SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

            [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                           COMMISSION FILE NO. 0-23087

                    STARTEC GLOBAL COMMUNICATIONS CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            MARYLAND                                   52-1660985
 (STATE OR OTHER JURISDICTION OF          (I.R.S. EMPLOYER IDENTIFICATION NO.)
 INCORPORATION OR ORGANIZATION)

10411 MOTOR CITY DRIVE, BETHESDA, MD                      20817
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)               (ZIP CODE)

                                 (301) 365-8959
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

          Securities registered pursuant to Section 12(g) of the Act:  None
                          Common Stock, $0.01 par value

       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  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 the  registrants'  knowledge,  in definitive proxy or information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [_]

       Non-affiliates   of  Startec  Global   Communications   Corporation  held
3,977,500  shares of Common Stock as of March 20, 1998. The fair market value of
the stock held by non-affiliates is $101,426,250  based on the sale price of the
shares on March 20, 1998.

     As of March 20, 1998,  8,919,615  shares of Common Stock,  par value $0.01,
were outstanding.

                      Documents Incorporated by Reference:

      Portions of the definitive Proxy Statement to be delivered to Stockholders
in  connection  with the Annual  Meeting of  Stockholders  are  incorporated  by
reference into Part III.
<PAGE>
                    STARTEC GLOBAL COMMUNICATIONS CORPORATION

                                    FORM 10-K

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                TABLE OF CONTENTS

PART I.
       Item 1.    BUSINESS.....................................................3
       Item 2.    PROPERTIES..................................................14
       Item 3.    LEGAL PROCEEDINGS...........................................15
       Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........15

PART II.
       Item 5.    MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
                     STOCKHOLDER MATTERS......................................15
       Item 6.    SELECTED FINANCIAL DATA.....................................16
       Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                     CONDITION AND RESULTS OF OPERATIONS......................17
       Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
                     RISK.....................................................21
       Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................22
       Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                     ACCOUNTING AND FINANCIAL DISCLOSURE......................39

PART III.
       Item 10.   DIRECTORS AND EXECUTIVE OFFICERS............................39
       Item 11.   EXECUTIVE COMPENSATION......................................39
       Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                     OWNERS AND MANAGEMENT....................................39
       Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............39

PART IV.
       Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                     ON FORM 8-K..............................................39



                                       2
<PAGE>
                                     PART I

NOTE ON FORWARD-LOOKING STATEMENTS

     This Form 10-K  contains  certain  forward-looking  statements  within  the
meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section
21E  of the  Securities  Exchange  Act  of  1934,  as  amended.  Forward-looking
statements are  statements  other than  historical  information or statements of
current condition.  Some forward-looking  statements may be identified by use of
terms  such  as  "believes",  "anticipates",   "intends",  or  "expects".  These
forward-looking  statements relate to the plans,  objectives and expectations of
Startec Global  Communications  Corporation (the "Company" or "Startec Global".)
for future operations.  In light of the risks and uncertainties  inherent in all
forward-looking  statements,  the inclusion of such statements in this Form 10-K
should not be regarded as a  representation  by the Company or any other  person
that the  objectives or plans of the Company will be achieved or that any of the
Company's  operating  expectations will be realized.  The Company's revenues and
results of operations are difficult to forecast and could differ materially from
those projected in the forward-looking  statements  contained herein as a result
of certain  factors  including,  but not limited  to,  dependence  on  operating
agreements with foreign partners,  significant foreign and U.S.-based  customers
and  suppliers,  availability  of  transmission  facilities,  U.S.  and  foreign
regulations,  international  economic and political  instability,  dependence on
effective  billing  and  information  systems,   customer  attrition  and  rapid
technological  change.  These factors should not be considered  exhaustive;  the
Company  undertakes no obligation to release  publicly the results of any future
revisions  it may  make to  forward-looking  statements  to  reflect  events  or
circumstances   after  the  date  hereof  or  to  reflect  the   occurrence   of
unanticipated events.

   ITEM 1.   BUSINESS

OVERVIEW

     STARTEC GLOBAL is a rapidly growing,  facilities-based  international  long
distance  carrier which  markets its services to select ethnic U.S.  residential
communities   that  have   significant   international   long  distance   usage.
Additionally,  to maximize the efficiency of its network  capacity,  the Company
sells its  international  long distance  services to some of the world's leading
carriers.  The Company provides its services through a flexible network of owned
and  leased  transmission  facilities,  resale  arrangements  and a  variety  of
operating  agreements  and  termination  arrangements.   The  Company  currently
operates international gateway facilities in New York City and Washington,  D.C.
In  addition  to  these  sites,  it  leases  switching   facilities  from  other
telecommunications carriers.

     The Company's mission is to dominate select  international  telecom markets
by strategically  building network facilities that allow it to manage both sides
of a telephone  call.  The Company  intends to own  multiple  switches and other
network  facilities  which allow it to  originate  and  terminate a  substantial
portion  of  its  own  traffic.  The  Company  believes  that  building  network
facilities,  acquiring  additional  termination options and expanding its proven
marketing strategy should lead to continued growth and improved profitability.

     In October 1997, the Company  completed an initial  public  offering of its
common stock (the  "Offering").  Together with the exercise of the overallotment
option in November 1997, the Offering placed  3,277,500  shares of common stock,
yielding net proceeds to the Company of approximately  $35 million.  The Company
has used $6.5 million of the net proceeds to repay indebtedness. The Company has
used approximately $2.1 million to purchase  international  switching  equipment
and undersea  fiber optic cables.  The Company  intends to use the remaining net
proceeds of the Offering to acquire cable facilities, switching, compression and
other related telecommunications  equipment, for marketing programs, to pay down
certain amounts due under the Company's existing credit facility and for working
capital and other general corporate purposes.

         The  Company  was  incorporated  in  Maryland  in 1989.  The  principal
executive  offices  of the  Company  are  located  at 10411  Motor  City  Drive,
Bethesda, Maryland 20817 and its telephone number is (301) 365-8959. The Company
changed its name in 1997 from  STARTEC,  Inc. to Startec  Global  Communications
Corporation.

INDUSTRY BACKGROUND

     The international  telecommunications industry consists of transmissions of
voice and data that  originate  in one country and  terminate  in another.  This
industry  is  experiencing  a period  of rapid  change  which  has  resulted  in
substantial  growth in international  telecommunications  traffic.  For domestic
carriers,  the international market can be divided into two major segments:  the
U.S.-originated  market,  which consists of all international calls which either
originate or are billed in the United  States,  and the overseas  market,  which
consists  of all calls  billed  outside  the  United  States.  According  to the
Company's market research, the international  telecommunications services market
was  approximately  $56 billion in aggregate  carrier revenues for 1995, and the
volume of international  traffic on the public telephone  network is expected to
grow at a compound  annual growth rate of 10% or more from 1997 through the year
2000.  The  U.S.-originated  international  market has  experienced  substantial
growth in recent years,  with revenues rising from  approximately  $8 billion in
1990 to approximately $14 billion in 1995.

                                       3

<PAGE>

     The Company believes that the international  telecommunications market will
continue to experience  strong growth for the foreseeable  future as a result of
the following developments and trends:

       o    Global    Economic    Development    and    Increased    Access   to
            Telecommunications  Services. The dramatic increase in the number of
            telephone lines around the world,  stimulated by economic growth and
            development,  government mandates and technological advancements, is
            expected   to   lead   to   increased   demand   for   international
            telecommunications services in those markets.

       o    Deregulation   of   Telecommunications   Markets.   The   continuing
            deregulation  and  privatization of  telecommunications  markets has
            provided,  and continues to provide,  opportunities for carriers who
            desire to penetrate those markets.

       o    Reduced Rates Stimulating  Higher Traffic Volumes.  The reduction of
            outbound international long distance rates, resulting from increased
            competition and technological advancements,  has made, and continues
            to make,  international  calling available to a much larger customer
            base thereby stimulating increased traffic volumes.

       o    Increased  Capacity.  The increased  availability of  higher-quality
            digital  undersea fiber optic cable has enabled  international  long
            distance carriers to improve service quality while reducing costs.

       o    Popularity  and  Acceptance  of  Technology.  The  proliferation  of
            communications  devices,  including cellular  telephones,  facsimile
            machines and communications  equipment has led to a general increase
            in the use of telecommunications services.

       o    Bandwidth   Needs.   The   demand   for   bandwidth-intensive   data
            transmission   services,   including   Internet-based   demand,  has
            increased  rapidly  and is  expected  to continue to increase in the
            future.

     DEVELOPMENT OF U.S. AND FOREIGN TELECOMMUNICATIONS MARKETS

     The 1984  court-ordered  dissolution of AT&T's monopoly over local and long
distance  telecommunications  fostered the  emergence of new U.S.  long distance
companies.  Today there are over 500 U.S. long distance companies, most of which
are small- or medium-sized companies, serving residential and business customers
and other  carriers.  In order to be successful,  these small- and  medium-sized
companies must offer customers a full range of services, including international
long distance.  However,  management believes most of these carriers do not have
the  critical  mass of traffic  to receive  volume  discounts  on  international
transmission  from the larger  facilities-based  carriers such as AT&T,  MCI and
Sprint,  or  the  financial  ability  to  invest  in  international  facilities.
Alternative international carriers, such as the Company, have capitalized on the
demand  created by these small- and  medium-sized  companies for less  expensive
international transmission facilities. These carriers are able to take advantage
of larger traffic volumes to obtain discounts on  international  routes (through
resale) and/or invest in facilities when volume on particular  routes  justifies
such  investments.   As  these  emerging   international  carriers  have  become
established,  they have also begun to carry  overflow  traffic  from larger long
distance providers which own international transmission facilities.

     Liberalization  and  privatization  have  also  allowed  new long  distance
providers to emerge in foreign markets. Liberalization began in the U.K. in 1981
when  Mercury,  a subsidiary  of Cable & Wireless  plc, was granted a license to
operate a  facilities-based  network and compete with British Telecom.  The 1990
adoption of the "Directive on  Competition in the Market for  Telecommunications
Services"  marked the  beginning  of  deregulation  in  Europe,  and a series of
subsequent  EU  directives,  reports  and  actions  are  expected  to  result in
substantial deregulation of the telecommunications  industries in most EU member
states  by 1998.  Liberalization  is also  occurring  on a global  basis as many
governments in Eastern Europe, Asia and Latin America privatize government-owned
monopolies and open their markets to competition.  Also,  signatories to the WTO
Agreement have committed,  to varying degrees, to allow access to their domestic
and  international  markets to  competing  telecommunications  providers,  allow
foreign  ownership  interests  in  existing  telecommunications   providers  and
establish  regulatory  schemes to develop and implement  policies to accommodate
telecommunications competition.

     As liberalization erodes the traditional monopolies held by single national
providers,  many of which are wholly or partially  government-owned  PTT's, U.S.
long  distance  providers  have the  opportunity  to  negotiate  more  favorable
agreements  with both the  traditional  and  newly-emerging  foreign  providers.
Further,  deregulation in certain countries is enabling U.S.-based  providers to
establish  local  switching  and  transmission  facilities  in those  countries,
allowing  them to terminate  their own traffic and begin to carry  international
long distance traffic originating in those countries.

     INTERNATIONAL SWITCHED LONG DISTANCE SERVICES

     International   switched  long  distance   services  are  provided  through
switching and transmission facilities that automatically route calls to circuits
based  upon  a  predetermined  set  of  routing   criteria.   In  the  U.S.,  an
international long distance call typically  originates on a LEC's network and is
transported to the caller's  domestic long distance  carrier.  The domestic long
distance  provider  picks up the call and carries the call to its own or another
carrier's  international  gateway switch,  where an international  long distance
provider  picks it up and sends it  directly  or through  one or more other long
distance providers to a corresponding gateway switch in the destination country.
Once the traffic  reaches  the  destination  country,  it is routed to the party
being called through that country's domestic telephone network.

                                       4
<PAGE>
     International  long distance  carriers are often  categorized  according to
ownership and use of transmission  facilities and switches.  No carrier utilizes
exclusively-owned  facilities  for  transmission  of all of  its  long  distance
traffic. Carriers vary from being primarily facilities-based,  meaning that they
own and operate their own  land-based  and/or  undersea  cable and switches,  to
those that are purely resellers of another carrier's  transmission  network. The
largest U.S.  carriers,  such as AT&T,  MCI,  Sprint and WorldCom  primarily use
owned  transmission  facilities  and  switches  and may  transmit  some of their
overflow  traffic  through other long distance  providers,  such as the Company.
Only  very  large  carriers  have  the  transmission  facilities  and  operating
agreements  necessary  to cover  the  over 200  countries  to which  major  long
distance providers generally offer service. A significantly larger group of long
distance  providers own and operate their own switches but use a combination  of
resale  agreements  with  other  long  distance  providers  and leased and owned
facilities  to  transmit  and  terminate  traffic,  or  rely  solely  on  resale
agreements with other long distance providers.

     Operating  Agreements.  Traditional  operating  agreements  provide for the
termination  of traffic  in,  and return  traffic  to,  the  international  long
distance  carriers'   respective   countries  for  mutual   compensation  at  an
"accounting  rate"  negotiated by each country's  dominant  carrier.  Under such
traditional operating agreements,  the international long distance provider that
originates  more traffic  compensates  the long  distance  provider in the other
country by paying an amount  determined by multiplying the net traffic imbalance
by half of the accounting rate.

     Under a typical  operating  agreement,  each  carrier  owns or  leases  its
portion of the transmission  facilities  between two countries.  A carrier gains
ownership  rights in digital  undersea  fiber  optic  cables by: (i)  purchasing
direct  ownership in a particular  cable (usually prior to the time the cable is
placed into service);  (ii) acquiring an IRU in a previously installed cable; or
(iii) by leasing or otherwise  obtaining  capacity  from  another long  distance
provider  that  has  either  direct  ownership  or IRU  rights  in a  cable.  In
situations  in which a long  distance  provider  has  sufficiently  high traffic
volume,  routing  calls across  cable that is directly  owned by a carrier or in
which a carrier  has an IRU is  generally  more  cost-effective  than the use of
short-term variable capacity  arrangements with other long distance providers or
leased cable.  Direct  ownership and IRU rights,  however,  require a carrier to
make an initial capital commitment based on anticipated usage.

     Transit   Arrangements.   In  addition  to  using   traditional   operating
agreements,   an   international   long   distance   provider  may  use  transit
arrangements,  pursuant to which a long  distance  provider  in an  intermediate
country carries the traffic to the  destination  country.  Transit  arrangements
require  agreement  among all of the carriers of the  countries  involved in the
transmission and termination of the traffic, and are generally used for overflow
traffic  or in cases in which a direct  circuit  is  unavailable  or not  volume
justified.

     Switched  Resale  Arrangements.   Switched  resale  arrangements  typically
involve the carrier  purchase and sale of termination  services between two long
distance  providers on a variable,  per minute basis. The resale of capacity was
first permitted as a result of the  deregulation of the U.S.  telecommunications
market,  and has  fostered  the  emergence  of  alternative  international  long
distance  providers  which  rely,  at least in part,  on  transmission  services
acquired  on a carrier  basis  from  other  long  distance  providers.  A single
international  call may pass through the facilities of multiple resellers before
it reaches the foreign  facilities-based carrier which ultimately terminates the
call. Resale arrangements set per minute prices for different routes,  which may
be  guaranteed  for a set  period  of  time  or may be  subject  to  fluctuation
following notice. The resale market for international  transmission  capacity is
continually  changing,  as new  long  distance  resellers  emerge  and  existing
providers  respond to changing costs and competitive  pressures.  In order to be
able to effectively manage costs when using resale  arrangements,  long distance
providers must have timely access to changing market prices and be able to react
to changes in costs through pricing adjustments and routing decisions.

     Alternative  Transit/Termination  Arrangements.  As the international  long
distance market began to be more competitive,  long distance providers developed
alternative  transit/termination  arrangements  in an effort to  decrease  their
costs of  terminating  international  traffic.  Some of the more  significant of
these arrangements  include refiling,  international  simple resale ("ISR"), and
ownership of switching  facilities  in foreign  countries.  Refiling of traffic,
which takes  advantage of  disparities  in settlement  rates  between  different
countries,  allows  traffic  to a  destination  country  to be  treated as if it
originated  in another  country  which  enjoys lower  settlement  rates with the
destination  country,  thereby  resulting in a lower overall  termination  cost.
Refiling  is similar to  transit,  except  that with  respect  to  transit,  the
facilities- based long distance provider in the destination country has a direct
relationship  with the  originating  long distance  provider and is aware of the
transit  arrangement,  while with refiling,  it is likely that the long distance
provider  in the  destination  country  is not aware that the  received  traffic
originated in another country with another carrier. To date, the FCC has made no
pronouncement  as to whether  refiling  complies  with U.S. or ITU  regulations,
although it is considering such issues in an existing proceeding.

     With ISR, a long distance provider completely bypasses the accounting rates
system by connecting an international leased private line to the public switched
telephone network of a foreign country or directly to the premises of a customer
or  foreign  partner.   Although  ISR  is  currently  sanctioned  by  applicable
regulatory  authorities only on a limited number of routes (including U.S.-U.K.,
U.S.-Canada, U.S.-Sweden, U.S.-New Zealand, U.K.-worldwide and Canada-U.K.), its
use is  increasing  and is  expected  to expand  significantly  as  deregulation
continues  in  the   international   telecommunications   market.  In  addition,
deregulation  has made it possible for  U.S.-based  long  distance  providers to
establish their own switching facilities in certain foreign countries,  allowing
them to directly terminate traffic.

                                       5
<PAGE>
COMPANY STRATEGY

     The  Company  began,  and  has  historically  operated,  as a  Switch-Based
Reseller.  The Company  currently is investing in network  infrastructure  which
will allow it to operate as a single-sided facilities-based carrier. Utilizing a
portion of the net proceeds from the Offering,  the Company intends to invest in
additional   network   infrastructure   with  the   objective   of  becoming  an
international dual-sided facilities-based carrier. In December 1997, the Company
used $1.0  million in net  proceeds  from the  Offering  to  acquire  additional
international gateway switching equipment.

     The  Company  intends to  implement  a network  hubbing  strategy,  linking
foreign-based switches and other telecommunications  equipment together with the
Company's  marketing  base in the  United  States.  To  implement  this  hubbing
strategy, the Company intends to: (i) build transmission capacity, including its
ability to originate and transport traffic; (ii) acquire additional  termination
options to increase  routing  flexibility;  and (iii) expand its  customer  base
through focused marketing efforts.

     A "hub" will  consist  of an  international  gateway  switch  and/or  other
telecommunications  equipment,  including cables and compression equipment.  Hub
locations  will  be  selected  based  on  their  similarity  to the  established
Company's U.S. model, in which identifiable international ethnic communities are
accessible,  and  where it is  possible  to  connect  with  some of the  leading
international  carriers.  Once established,  these hubs will be connected to the
Company's  marketing base in the United States.  Management believes the hubbing
strategy  will allow the  Company to move from a  single-sided  facilities-based
carrier to a dual-sided  facilities-based carrier serving ethnic communities and
telecommunication carriers in select markets worldwide.

     The  Company's  strategy  for  achieving  this  objective  consists  of the
following key elements:

     Build Transmission Capacity. The Company originates and transports customer
traffic through a network of Company-owned and managed facilities and facilities
leased or acquired through resale arrangements from other  facilities-based long
distance  carriers.  The additional  traffic generated by the Company's expanded
customer base and increased usage of its long distance services will necessitate
the acquisition of additional switching and transmission capacity. To meet these
needs, the Company has begun to implement a strategic  build-out of its network,
including installation of improved switching facilities,  planned acquisition of
ownership interests in and/or rights to use digital undersea fiber optic cables,
and installation of compression  equipment to increase capacity on those cables.
The Company has also taken steps to improve its systems  supporting  the network
and further enhance the quality of its services by adding equipment  upgrades in
its  network  monitoring  and  customer  service  centers,  and plans to install
enhanced software which will allow it to monitor call traffic routing, capacity,
and quality.  Building  additional  switching  and  transmission  capacity  will
decrease  the  Company's  reliance on leased  facilities  and  exposure to price
fluctuations. The Company's goal in taking these actions is to improve its gross
margin and provide  greater  assurance  of the quality  and  reliability  of its
services.

     Acquire Additional  Termination Options.  Customer traffic is terminated in
the   destination   country  through  a  variety  of   arrangements,   including
international  operating agreements.  The anticipated expansion of the Company's
customer base in existing and new target markets,  and the resulting increase in
traffic,  will  require the Company to provide  additional  methods to terminate
that traffic.  As part of its hubbing  strategy,  the Company plans to explore a
number  of  options  including   additional  operating   agreements,   strategic
alliances,  transit and refile  arrangements,  and the  acquisition of switching
facilities in foreign countries. The increase in termination options is expected
to provide greater routing  flexibility and  reliability,  as well as permitting
greater management and control over the cost of transmitting customers' calls.

     Expand Customer Base. The Company will continue to target additional ethnic
U.S. residential communities with significant international long distance usage.
In addition,  the Company plans to extend its marketing efforts outside the U.S.
into  countries  which have ethnic  communities  which the Company  believes are
potential  customers,  and to begin  marketing  its long  distance  services  to
U.S.-based small businesses which have an international  focus. The Company will
also consider  opportunities  to increase its residential  customer base through
strategic  alliances and  acquisitions.  By increasing its residential  customer
base, the Company's goal is to capture  operating  efficiencies  associated with
high traffic volumes and to increase its margins.

     The Company's marketing  strategy,  which targets select ethnic communities
is attractive to foreign  carriers who enter into agreements with the Company in
order to capture outgoing  international  U.S. traffic from customers located in
their  corresponding U.S. ethnic  communities.  As a result of the relationships
established  by  these   agreements,   the  Company   expects  that  its  global
telecommunications  network  will become more cost  effective  and will make the
Company an attractive supplier to the world's leading carriers. The Company also
anticipates that its hubbing  strategy will allow it to serve carrier  customers
over a wider geographical area.

CUSTOMERS

     The number of the Company's  residential  customers has grown significantly
over the past three  years,  from  approximately  6,300 as of January 1, 1995 to
more than 71,500 as of December  31, 1997 (as  measured  over a 30 day  period).
These  customers  generally  are  members  of  ethnic  groups  that  tend  to be
concentrated in major U.S. metropolitan areas,  including Asian, Middle Eastern,
Sub-Saharan  African,  and European  communities.  Net revenues from residential
customers  accounted  for  approximately  51%, 37% and 33% of the  Company's net
revenues in the years ended December 31, 1995, 1996, and 1997, respectively.  No
single residential customer accounted for more than one percent of the Company's
revenues during those periods.

     The number of the Company's carrier customers also has grown  significantly
since the Company  first began  marketing  its  services to this segment in late
1995. As of December 31, 1997, the Company had 39 active carrier customers, with
revenues from carrier customers accounting for 49%, 63% and 67% of the Company's
net revenues in the years ended December 31, 1995, 1996, and 1997, respectively.
One of these carrier  customers,  WorldCom,  accounted for  approximately 23% of
total net revenues in the years ended  December 31, 1996 and 1997.  In addition,
certain carrier  customers also accounted for more than 10% of the Company's net
revenues  during the fiscal years ended  December 31,  1995,  1996

                                       6
<PAGE>
and 1997. In 1995,  VSNL  accounted for  approximately  19% of net revenues.  In
1997,  Frontier  accounted for 14% of net revenues.  No other customer accounted
for 10% or more of the  Company's net revenues  during 1995,  1996 or 1997. In a
number of  cases,  the  Company  provides  services  to  carriers  that are also
suppliers to the Company.

     Substantially all of the Company's revenues for the past three fiscal years
have  been  derived  from  calls  terminated  outside  the  United  States.  The
percentages of net revenues  attributable  on a  region-by-region  basis are set
forth in the table below.
                                                   YEAR ENDED DECEMBER 31,
                                                   -----------------------
                                                   1995     1996     1997
                                                   ----     ----     ----
  Asia/Pacific Rim...............................   66.4 %  43.0 %   49.0 %
  Middle East/North Africa.......................    6.6    25.7     24.7
  Sub-Saharan Africa.............................    0.3     3.5      7.4
  Eastern Europe.................................    3.0     8.2      9.3
  Western Europe.................................   15.7     5.5      2.2
  North America..................................    4.7    11.5      4.0
  Other..........................................    3.3     2.6      3.4
                                                   -----    -----    -----
                                                     100.0 %  100.0% 100.0%
                                                   ======   =====    =====

     The Company has entered into operating  agreements  with  telecommunication
carriers in foreign countries under which international long-distance traffic is
both delivered and received.  Under these  agreements,  the foreign carriers are
contractually  obligated to adhere to the policy of the FCC, which requires that
traffic from the foreign country is routed to  international  carriers,  such as
the  Company,  in the same  proportion  as  traffic  carried  into the  country.
Mutually  exchanged  traffic between the Company and foreign carriers is settled
through a formal settlement policy at agreed upon rates per minute.  The Company
records  the amount due to the  foreign  partner as an expense in the period the
traffic is terminated. When the return traffic is received in the future period,
the  Company  generally  realizes a higher  gross  margin on the return  traffic
compared to the lower  margin (or  sometimes  negative  margin) on the  outbound
traffic.  Revenue  recognized from return traffic was approximately $2.0 million
$1.1  million , and $1.4  million,  or 19%,  3%, and 2% of net revenues in 1995,
1996,  and 1997,  respectively.  There can be no assurance  that traffic will be
delivered back to the United States or what impact changes in future  settlement
rates, allocations among carriers or levels of traffic will have on net payments
made and revenues received.

SERVICES AND MARKETING

     The Company  focuses  primarily  on the  provision  of  international  long
distance services to targeted residential  customers in major U.S.  metropolitan
areas.  The Company also offers  international  long distance  services to other
telecommunications carriers and interstate long distance services in the U.S.

     Using part of the proceeds  obtained under the Credit Agreement (or "Loan")
in July 1997 and a portion of the proceeds of the Offering, the Company recently
expanded  its  residential   marketing  program,   targeting  additional  ethnic
communities  with significant  international  long distance usage and increasing
its efforts within its current target  markets.  The Company intends to continue
to  use  a  portion  of  the  remaining  proceeds  of  the  Offering  to  expand
significantly its residential  marketing  programs in the U.S., and to implement
its marketing strategy abroad.

     Residential Customers

     The Company generally  provides  international  and interstate  residential
long distance  customers with  dial-around  long distance  service.  Residential
customers access STARTEC GLOBAL'S network by dialing its CIC code before dialing
the  number  they are  calling.  Using a CIC Code to access the  Company  allows
customers  to use the  Company's  services at any time  without  changing  their
existing  long  distance  carrier.  It is also possible for a customer to select
STARTEC GLOBAL as its default long distance carrier.  In this instance,  the LEC
would  automatically  route all of that  customer's  long distance calls through
STARTEC  GLOBAL'S  network.  As  part of its  marketing  strategy,  the  Company
maintains a comprehensive database of customer information which is used for the
development of marketing programs, strategic planning, and other purposes.

     The Company  invests  substantial  resources in identifying  and evaluating
potential markets for its services. In particular,  the Company looks for ethnic
groups having qualities and characteristics which indicate a large potential for
high-volume  international  telecommunications  usage.  Once a  market  has been
identified, the Company evaluates the opportunity presented by that market based
upon  factors  that  include  the credit  characteristics  of the target  group,
switching requirements,  network access and vendor diversity.  Assuming that the
target market meets the Company's  criteria,  the Company  implements  marketing
programs targeted specifically at that ethnic group, with the goal of generating
region-specific  international  long distance  traffic.  The Company markets its
residential  services  under the  "STARTEC"  name  through  a variety  of media,
including low-cost print advertising, radio and television advertising on ethnic
programs and direct mail, all in the customers' native language.The Company also
sponsors and attends community events and trade shows


                                       7
<PAGE>
     Potential  customers  call  a toll  free  number  and  are  connected  to a
multilingual customer service representative.  The Company uses this opportunity
to  obtain  detailed  information  regarding,  among  other  things,  customers'
anticipated calling patterns. The customer service representative then sends out
a welcome pack  explaining how to use the services.  Once the customer begins to
use the services, the Company monitors usage and periodically  communicates with
the customer to gauge service satisfaction. STARTEC GLOBAL also uses proprietary
software  to assist  it in  tracking  customer  satisfaction  and a  variety  of
customer  behaviors,  including turnover  ("churn"),  retention and frequency of
usage.

     The Company  currently  markets its services to the Asian,  Middle Eastern,
Sub-Saharan  African,  and European  communities  in the U.S. In  addition,  the
Company is  considering  marketing  its services  internationally  in geographic
areas that have ethnic  communities  that may meet the  Company's  criteria  for
potential target markets.

     In addition to its current long distance services,  the Company continually
evaluates  potential  new service  offerings  in order to  increase  traffic and
customer  retention and loyalty.  New services the Company  expects to introduce
include Home Country Direct  Services  which  provides  customers with access to
STARTEC  GLOBAL'S  network  from any  country  and allows  them to place  either
collect or  credit/debit  card calls,  and Prepaid  Domestic  and  International
Calling  Cards  which can be used from any touch  tone  telephone  in the United
States, Canada or the United Kingdom.

     Carrier Customers

     To maximize the efficiency of its network  capacity,  the Company sells its
international  long  distance  services  to  other  telecommunication  carriers.
STARTEC  GLOBAL has been actively  marketing  its services to carrier  customers
since  late  1995  and  believes  that  it  has  established  a high  degree  of
credibility and valuable  relationships  with the leading carriers.  The Company
participates in international  carrier  membership  organizations,  trade shows,
seminars and other events that provide its marketing staff with opportunities to
establish  and maintain  relationships  with other  carriers  that are potential
customers.  The Company  generally  avoids  providing  services to  lower-tiered
carriers because of potential difficulties in collecting accounts receivable.

THE STARTEC GLOBAL NETWORK

     The Company  provides its services  through a flexible network of owned and
leased transmission facilities, resale arrangements,  and a variety of operating
agreements  and  termination  arrangements,  all of which  allow the  Company to
terminate traffic in every county which has telecommunication  capabilities. The
Company has been  expanding its network to match  increases in its long distance
traffic  volume,  and has recently  begun to implement  plans for a  significant
strategic build-out of the STARTEC GLOBAL network.  The purpose of the build-out
is to increase  profitability  by controlling  costs,  while  maintaining a high
degree  of  network  quality  and  reliability.  The  network  employs  advanced
switching  technologies  and is  supported  by  monitoring  facilities  and  the
Company's technical support personnel.

     Switching and Transmission Facilities

     The Company  currently has  installed an  international  gateway  switching
facility in New York City and owns and  operates  and  international  gateway in
Washington,  D.C. The Company began  migrating  traffic from its Washington D.C.
switch to the New York switch in the first quarter of 1998. When all traffic has
been migrated to the New York switch, the Washington,  D.C. location will become
a  point-of-presence  and the switch transferred to Chicago in the third quarter
of 1998.  This  installation  of a switch in New York City is expected to reduce
leased line charges and increase the Company's  ability to originate  traffic on
its own  network.  In  addition,  the New York City  facility is larger than the
Company's  Washington,  D.C.  facility,  which  enabled the Company to install a
larger and more cost effective  switch.  The Company has also purchased a switch
for an additional international gateway facility in Los Angeles, California.

     International long distance traffic is transmitted through an international
gateway  switch,  across  undersea  digital  fiber  optic  cable  lines  or  via
satellite,  to the destination  country.  STARTEC GLOBAL has recently  purchased
Indefeasible Rights of Usage (IRUs) on the Cantat-3,  Canus-1,  Columbus II, and
Columbus III cables.  It accesses  additional  cables and  satellite  facilities
through arrangements with other carriers.  The Company is currently  negotiating
for the acquisition of IRUs on cables throughout the world. The Company believes
that it may achieve  substantial  savings by acquiring  additional  IRUs,  which
would reduce its dependence on leased cable access. Having an ownership interest
rather than a lease  interest in undersea  cable enables the Company to increase
its  capacity  without a  significant  increase in cost,  by  utilizing  digital
compression  equipment,  which it  cannot do under  leasing  or  similar  access
arrangements. Digital compression equipment enhances the traffic capacity of the
undersea cable,  which permits the Company to maximize cable  utilization  while
reducing  the  Company's  need to acquire  additional  capacity.  The Company is
currently in negotiations to acquire digital compression equipment.

     The Company enters into lease arrangements and resale agreements with other
telecommunications  carriers when cost effective. The Company purchases switched
minute  capacity  from  various  carriers  and  depends on such  agreements  for
termination  of its  traffic.  The Company  currently  purchases  capacity  from
approximately 37 carriers. Purchases from the five largest suppliers of capacity
represented  67% and 47% of the Company's  total cost of services for the fiscal
years ended  December  31, 1996 and 1997,  respectively.  During the fiscal year
ended  December  31,  1996,  VSNL,  Cherry  Communications,  Inc.,  and WorldCom
accounted for 25%, 13% and 13% of total cost of services,  respectively.  During
the fiscal year ended December 31, 1997,  WorldCom and Pacific Gateway  Exchange
accounted for and 13% and 12% of total costs of services, respectively. No other
supplier accounted for 10% or more of the Company's cost of sales during 1996 or
1997

                                       8
<PAGE>
     Further,  the Company  utilizes  the  services of several  alternate,  cost
effective  carriers in order to  transport  and  terminate  its  traffic.  These
alternative  carriers provide the Company with substantial  flexibility and cost
efficiency, as well as diversity, in the event one carrier's charges increase or
such carrier is not capable of providing  the services  STARTEC  GLOBAL needs in
order to transport and terminate its traffic.

     The  Company's  efforts  to build  additional  switching  and  transmission
capacity are intended to decrease the  Company's  reliance on leased  facilities
and resale agreements. The strength of the Company's international operations is
based upon the diversity of its cost effective  routes to terminal  points.  The
primary benefits of owning and operating  additional  network facilities instead
of  leasing  or  reselling  another   carrier's   capacity  arise  from  reduced
transmission costs and greater control over service quality and reliability. The
transmission  cost for a call that is not routed  through  the  Company's  owned
facilities is dependent upon the cost per minute paid to the underlying carrier.
In contrast, the cost of a call routed through the Company's owned facilities is
dependent upon the total fixed costs  associated with owning and operating those
facilities.  As  traffic  across  the  owned  facilities  increases,  management
believes the Company can capture operating efficiencies and improve its margins.

     Termination Arrangements

     STARTEC GLOBAL attempts to retain  flexibility and maximize its termination
options by using a mix of operating agreements, transit and refile arrangements,
resale  agreements  and other  arrangements  to  terminate  its  traffic  in the
destination  country.  The  Company's  approach is designed to enable it to take
advantage of the rapidly  evolving  international  telecommunications  market in
order to provide low cost international long distance services to its customers.

     The Company currently has effective operating  agreements with the national
telecommunications  administrations of India, Uganda,  Syria, Monaco,  Malaysia,
and the Dominican Republic under which it exchanges traffic. The Company pursues
additional   operating   agreements   with   other   foreign   governments   and
administrations  on an ongoing  basis.  In  addition,  the  Company  uses resale
agreements  and  transit and refile  arrangements  to  terminate  its traffic in
countries with which it does not have operating agreements. These agreements and
arrangements  provide the Company with multiple  options for routing  traffic to
each destination country.

     The Company is also exploring the  possibility  of acquiring  facilities in
certain foreign countries, including the United Kingdom. This option is becoming
increasingly   available  as   deregulation   continues  in  the   international
telecommunications  market,  and would provide the Company with opportunities to
terminate its own traffic and better control customer calls.

     Network Operations, Technical Support and Customer Service

     The  Company  uses   proprietary   routing  software  to  maximize  routing
efficiency.  Network operations personnel continually monitor pricing changes by
the Company's  carrier-suppliers  and adjust call routing to make cost efficient
use of available  capacity.  In addition,  the Company  provides 24-hour network
monitoring,  trouble reporting and response procedures,  service  implementation
coordination  and  problem  resolution.  The  Company  has  developed  and  used
proprietary  software  which allows it to monitor,  on a minute by minute basis,
all key aspects of its services. Recent software upgrades and additional network
monitoring  equipment  have been  installed to enhance the Company's  ability to
handle increased traffic and monitor network operations.  The Company's customer
service  center,  which  services the  residential  customer base, is staffed by
trained, multilingual customer service representatives,  and operates 24 hours a
day seven days a week. The customer service center uses advanced ACD software to
distribute incoming calls to its customer service representatives.

     The Company generally utilizes redundant, highly automated state-of-the-art
telecommunications  equipment  in its network and has diverse  alternate  routes
available in cases of component or facility failure,  or in the event that cable
transmission  wires are  inadvertently  cut. Back-up power systems and automatic
traffic re-routing enable the Company to provide a high level of reliability for
its customers.  Computerized  automatic network monitoring equipment allows fast
and accurate  analysis  and  resolution  of network  problems.  In general,  the
Company relies upon other carriers'  networks to provide redundancy in the event
of technical  difficulties in the network.  The Company  believes that this is a
more cost  effective  strategy  than  purchasing  or leasing  its own  redundant
capacity.

MANAGEMENT INFORMATION AND BILLING SYSTEMS

     The Company's  operations use advanced  information  systems including call
data collection and call data storage linked to a proprietary  reporting system.
The Company  also  maintains  redundant  billing  systems for rapid and accurate
customer  billing.  The Company's  systems  enable it, on a real time basis,  to
determine cost effective  termination  alternatives,  monitor customer usage and
manage profit margins.  The Company's  systems also enable it to ensure accurate
and timely billing and reduce routing errors.

     The Company's  proprietary reporting software compiles call, price and cost
data into a variety of  reports  which the  Company  can use to  re-program  its
routes on a real time basis.  The  Company's  reporting  software  can  generate
additional reports, as needed,  including customer usage,  country usage, vendor
rates, vendor usage by minute, dollarized vendor usage, and loss reports.

     The Company has built multiple  redundancies into its billing and call data
collection  systems.   Two  call  collector  computers  receive  redundant  call
information  simultaneously,  one of which  produces  a file  every 24 hours for
filing  purposes  while  the  other  immediately  forwards  the  called  data to
corporate  headquarters  for use in customer service and traffic  analysis.  The
Company maintains two independent and redundant billing systems in order to both
verify  billing  internally  and to ensure  that  bills are sent out on a timely
basis. All of the call data, and resulting billing data, are continuously backed
up on tape drive and redundant storage devices.


                                       8
<PAGE>
     Residential  customers  are billed for the Company's  services  through the
LEC, with the Company's charges appearing  directly on the bill each residential
customer  receives  from its LEC.  The Company  utilizes a third  party  billing
company to facilitate  collections  of amounts due to the Company from the LECs.
The third party billing company receives  collections from the LEC and transfers
the sums to the Company,  after withholding  processing fees,  applicable taxes,
and provisions for credits and uncollectible  accounts. As part of its strategy,
the Company also plans to enter into billing and collection  agreements directly
with certain LECs,  which will provide the Company with  opportunities to reduce
some of the costs currently associated with billing and collection.

COMPETITION

     The long distance  telecommunications industry is intensely competitive. In
many of the markets  targeted by the Company there are numerous  entities  which
are  currently  competing  for the same  residential  and carrier  customers and
others  which  have   announced   their   intention  to  enter  those   markets.
International and interstate  telecommunications  providers compete on the basis
of price, customer service,  transmission quality,  breadth of service offerings
and value-added services.  Residential customers frequently change long distance
providers in response to  competitors'  offerings of lower rates or  promotional
incentives,  and, in general, the Company's customers can switch carriers at any
time. In addition,  the availability of dial-around  long distance  services has
made it possible for  residential  customers to use the services of a variety of
competing long distance  providers without the necessity of switching  carriers.
The Company's carrier  customers  generally also use the services of a number of
other  international  long distance  telecommunications  providers.  The Company
believes that  competition in its  international  and  interstate  long distance
markets is likely to increase as these markets continue to experience  decreased
regulation and as new technologies are applied to telecommunications. Prices for
long distance calls in several of the markets in which the Company competes have
declined  in recent  years and are likely to  continue  to  decrease.  While the
Company  competes  generally  with  the  domestic  and  international   carriers
discussed  herein,  it believes  that  STARTEC  GLOBAL is a leader in its chosen
business  niche - the  provision  of  international  long  distance  services to
residential customers in targeted ethnic markets.

     The U.S.-based international telecommunication services market is dominated
by AT&T, MCI and Sprint.  The Company also competes with numerous other carriers
in certain markets, including WorldCom,  Frontier, and Pacific Gateway Exchange.
Some of these competitors focus their efforts on the same customers  targeted by
the Company.  In addition,  many of the Company's  current  competitors are also
Company customers. The Company's business could be materially adversely affected
if a significant  number of those customers  reduce or cease doing business with
the Company for competitive reasons.

     Recent and pending deregulation initiatives in the U.S. and other countries
may encourage  additional  new industry  entrants.  The  Telecommunications  Act
permits and is designed to promote  additional  competition  in the  intrastate,
interstate and international  telecommunications  markets by both U.S.-based and
foreign  companies,  including the RBOCs. In addition,  pursuant to the terms of
the WTO Agreement,  countries who are  signatories to the agreement are expected
to allow  access  to their  domestic  and  international  markets  to  competing
telecommunications  providers,  allow  foreign  ownership  interests in existing
telecommunications  providers  and  establish  regulatory  schemes and  policies
designed to  accommodate  telecommunications  competition.  The Company  also is
likely to be subject  to  additional  competition  as a result of mergers or the
formation of alliances  among some of the largest  telecommunications  carriers.
Recent examples of mergers and alliances  include the planned merger of WorldCom
and MCI and the "Global One" alliance among Sprint,  Deutsche Telekom and France
Telecom.

     Many  of  the  Company's   competitors  are  significantly   larger,   have
substantially  greater  financial,  technical and marketing  resources  than the
Company,   own  or  control  larger   networks,   transmission  and  termination
facilities,  and offer a broader variety of services than the Company,  and have
strong name recognition, brand loyalty, and long-standing relationships with the
many of the  Company's  target  customers.  In addition,  many of the  Company's
competitors  enjoy  economies of scale that can result in a lower cost structure
for  transmission  and other  costs of  providing  services,  which  could cause
significant  pricing  pressures  within  the  long  distance  telecommunications
industry.  If the Company's  competitors were to devote  significant  additional
resources  to the  provision  of  international  long  distance  services to the
Company's  target customer base, the Company's  business,  results of operations
and financial condition could be materially adversely affected.

     The  telecommunications  industry  is in a period  of  rapid  technological
evolution,  marked by the introduction of new product and service  offerings and
increasing  satellite  and  undersea  cable  transmission  capacity for services
similar to those provided by the Company.  Such  technologies  include satellite
and ground based systems,  utilization of the Internet for voice, data and video
communications,  and digital  wireless  communication  systems  such as personal
communications  services ("PCS"). The Company is unable to predict which of many
future  product  and  service  offerings  will  be  important  to  maintain  its
competitive  position  or the  expenditures  that may be  required  to  acquire,
develop or otherwise provide such products and services.

GOVERNMENT REGULATION

     Overview

     The Company's  business is subject to varying  degrees of federal and state
regulation.  Federal laws and the  regulations of the FCC apply to the Company's
international  and  interstate  facilities-based  and resale  telecommunications
services,  while  applicable  PSCs  have  jurisdiction  over  telecommunications
services originating and terminating within the same state. At the federal level
the Company is subject to common carriage  requirements under the Communications
Act.  Comprehensive  amendments  to the  Communications  Act  were  made  by the
Telecommunications Act. The purpose of the 1996 Act is to promote competition in
all areas of telecommunications  by reducing unnecessary  regulation at both the
federal and state levels to the greatest extent  possible.  The FCC and PSCs are
in the process of implementing the 1996 Act's regulatory reforms.

                                       10

<PAGE>
     In addition,  although the laws of other  countries  only directly apply to
carriers  doing  business  in  those  countries,  the  Company  may be  affected
indirectly by such laws insofar as they affect  foreign  carriers with which the
Company does business. There can be no assurance that future regulatory judicial
and legislative  changes will not have a material adverse effect on the Company,
that U.S. or foreign  regulators or third parties will not raise material issues
with regard to the Company's  compliance or  noncompliance  with applicable laws
and regulations,  or that regulatory activities will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover,  the FCC and the PSCs  generally  have  the  authority  to  condition,
modify,  cancel,  terminate  or revoke the  Company's  operating  authority  for
failure to comply with federal and state laws and applicable rules,  regulations
and policies.  Fines or other penalties also may be imposed for such violations.
Any such action by the FCC and/or the PSCs could have a material  adverse effect
on the Company's business,  financial  condition and results of operations.  See
"Risk Factors Government Regulation."

     Federal and State Transactional Approvals

The FCC and certain PSCs also impose prior approval requirements on transfers or
changes of control,  including  pro forma  transfers  of control  and  corporate
reorganizations, and assignments of regulatory authorizations. Such requirements
may have the effect of delaying,  deterring or preventing a change in control of
the  Company.  The Company  also is required to obtain  state  approval  for the
issuance of securities. Seven of the states in which the Company is certificated
provide for prior approval or  notification of the issuance of securities by the
Company.  Although the necessary approvals will be sought and notifications made
prior to the  offering,  because of time  constraints,  the Company may not have
obtained  such  approval  from two of the states  prior to  consummation  of the
Offering.  The Company's intrastate revenues for the first half of 1997 for each
of the two states was less than $100 for each such state.  Although  these state
filing  requirements may have been preempted by the National  Securities  Market
Improvement Act of 1996, there is no case law on this point.  After consultation
with  counsel,  the  Company  believes  the  approvals  will be granted and that
obtaining  such  approvals  subsequent to the Offering  should not result in any
material adverse consequences to the Company, although there can be no assurance
that such consequences will not result.

   International Services

     International  telecommunications carriers are required to obtain authority
from the FCC under  Section  214 of the  Communications  Act in order to provide
international  service that originates or terminates in the United States.  U.S.
international  common  carriers  also are required to file and maintain  tariffs
with the FCC specifying the rates,  terms, and conditions of their services.  In
1989,  the Company  received  Section 214 authority  from the FCC to acquire and
operate satellite facilities for the provision of direct  international  service
to Italy, Israel, Kenya, India, Iran, Saudi Arabia,  Pakistan,  Sri Lanka, South
Korea and the United Arab  Emirates  ("UAE").  The Company also is authorized to
resell  services of other common  carriers for the provision of switched  voice,
telex,  facsimile  and other data  services,  and for the  provision of INTELSAT
Business  Services  ("IBS")  and  international  television  services to various
overseas points.

     In 1996, the FCC  established  new rules that  streamlined  its Section 214
authorization and tariff regulation  processes to provide for shorter notice and
review periods for certain U.S.  international  carriers  including the Company.
The FCC established  streamlined regulation for "non-dominant"  carriers service
providers  found to lack  market  power on the  routes  served.  The  Company is
classified  by the  FCC as a  non-dominant  carrier  on  its  international  and
domestic   routes.   On  August  27,  1997,   the  Company  was  granted  global
facilities-based   Section  214  authority   under  the  FCC's  new  streamlined
processing rules. A  facilities-based  global Section 214 authorization  enables
the  Company  to provide  international  basic  switched,  private  line,  data,
television and business  services using  authorized  facilities to virtually all
countries in the world.

    Additionally,  the U.K.  Department  of Trade  and  Industry  issued  to the
Company an International Simple Resale ("ISR") License for the United Kingdom in
October,  1997. The ISR License allows the Company to resell traffic originating
in the  U.K.  Pursuant  to  regulatory  restructure  in the U.K.  introduced  in
December,  1997,  the ISR License will be replaced by the  International  Simple
Voice  Resale  ("ISVR")  License.  Application  for the ISVR  license is pending
approval.

     The FCC's  streamlined  rules also provide for global Section 214 authority
to resell  switched and private line services of other carriers by  non-dominant
international  carriers.  The FCC  decides  on a  case-by-case  basis,  however,
whether to grant Section 214 authority to U.S. carriers  affiliated with foreign
carriers. The FCC will grant authority to provide switched services by reselling
private lines of foreign  carriers  based on a showing that there are equivalent
resale  opportunities  for U.S.  carriers in the foreign carrier's market or the
FCC's  benchmark for settlement  rates are met in the  destination  country.  To
date, the FCC has found that Austria,  Canada,  the U.K., Sweden and New Zealand
do provide  equivalent resale  opportunities.  The FCC has found that equivalent
resale  opportunities  do not exist in The Netherlands,  Germany,  Hong Kong and
France.  It is possible  that  interconnected  private line resale to additional
countries may be allowed in the future.  Pursuant to FCC rules and policies, the
Company's  authorization  to provide  service  via the resale of  interconnected
international  private lines will be expanded to include countries  subsequently
determined  by the  FCC to  afford  equivalent  resale  opportunities  to  those
available  under  United  States  law,  if any.  On October  30,  1997,  the FCC
authorized  Telmex and Sprint to resell switched  services  between the U.S. and
Mexico but conditioned  that  authorization  on a commitment from Telmex that it
reduce the rate at which it settles  international  traffic  within the next two
years. U.S.  international carriers have sought review of the FCC's decision. As
a result of the recent  signing of the WTO  Agreement,  the FCC has replaced the
"equivalency"  test  with  a  rebuttable  presumption  in  favor  of  resale  of
interconnected private lines to WTO member countries.  Under new FCC rules which
took effect on February 9, 1998,  upon entry into force of the WTO  Agreement of
February 5, 1998, the FCC will authorize the provision of switched  service over
private lines between the U.S. and a WTO member country if either the settlement
rates for at least 50 percent of the  settled  U.S.-billed  traffic  between the
U.S. and that country are at or below the FCC's  benchmark  settlement  rate for
that country or the country  satisfies he FCC's  equivalency  test. The FCC will
authorize the provision of switched  service over private lines between the U.S.
and a non-WTO member  country only if both the settlement  rates for at least 50
percent of the settled U.S.-billed traffic between the U.S. and that country are
at or below the FCC's benchmark  settlement rate for that country or the country
satisfies  the  FCC's  equivalency  test.  Since  the  new  rules  took  effect,
applications  have been filed with the FCC for authorization to provide switched
service  by resale of private  lenes  between  the U.S.  and such

                                       11

<PAGE>
countries as Luxembourg, Denmark, Norway, France, Germany, and Belgium, based on
showings that at least 50 percent of U.S.-billed  traffic is settled at or below
the FCC's benchmark settlement rate for those countries.

     The Company must also conduct its international business in compliance with
the ISP. The ISP  establishes  the parameters by which  U.S.-based  carriers and
their foreign correspondents settle the cost of terminating each other's traffic
over their respective networks.  The precise terms of settlement are established
in a  correspondent  agreement  (also referred to as an "operating  agreement"),
which also sets forth the term of the agreement, the types of service covered by
the agreement,  the division of revenues  between the carrier that bills for the
call and the carrier that terminates the call at the other end, the frequency of
settlements,  the  currency  in which  payments  will be made,  the  formula for
calculating traffic flows between countries, technical standards, and procedures
for the settlement of disputes.  The amount of payments (the "settlement  rate")
is  determined  by the  negotiated  accounting  rate  specified in the operating
agreement.  Under the ISP, the settlement rate generally must be one-half of the
accounting rate. Carriers must obtain waivers of the FCC's rules if they wish to
use an  accounting  rate  that  differs  from  the  prevailing  rate or vary the
settlement rate from one-half of the accounting rate.

     The  ISP  is  designed  to  eliminate  foreign  carriers'   incentives  and
opportunities  to  discriminate in their  operating  agreements  among different
U.S.-based  carriers through a practice referred to as "whipsawing."  Whipsawing
involves a foreign carrier varying the accounting and/or settlement rate offered
to different  U.S.-based carriers for the benefit of the foreign carrier,  which
could secure various incentives by favoring one U.S.-based carrier over another.
Under the uniform  settlements  policy,  U.S.-based carriers can only enter into
operating  agreements that contain the same accounting rate and settlement terms
offered to all U.S.-based carriers in that country and provide for proportionate
return traffic.  When a U.S.-based  carrier negotiates an accounting rate with a
foreign  carrier  that is lower  than the  accounting  rate  offered  to another
U.S.-based  carrier for the same service,  the U.S.-based carrier with the lower
rate must file a notification  letter with the FCC. If a U.S.-based carrier does
not already have an operating  agreement in effect,  it must file a request with
the FCC to modify the accounting rate for that country to introduce service with
the foreign  correspondent  in that  country.  A  U.S.-based  carrier  also must
request  modification  authority  from  the  FCC for  any  proposal  that is not
prospective,  that is not a simple  reduction in the  accounting  rate,  or that
changes  the  terms and  conditions  of an  existing  operating  agreement.  The
notification and modification  procedures are intended to provide all U.S.-based
carriers   with  an   opportunity   to   compete   in   foreign   markets  on  a
nondiscriminatory  basis.  Among  other  efforts  to  counter  the  practice  of
whipsawing and inequitable  treatment of similarly situated U.S.-based carriers,
the FCC adopted the principle of proportionate  return - which requires that the
U.S.  carrier  terminate  U.S.-inbound  traffic  in the same  proportion  as the
U.S-outbound traffic that it sends to the foreign correspondent - to assure that
competing  U.S.-based  carriers have roughly equitable  opportunities to receive
the return  traffic that reduces the  marginal  cost of providing  international
service.

     Consistent  with  its  pro-competition  policies,  the FCC  has  prohibited
U.S.-based carriers from agreeing to accept special concessions from any foreign
carrier or administration.  A special concession is any arrangement that affects
traffic  flow to or from the  U.S.  that is  offered  exclusively  by a  foreign
carrier or  administration  to a particular U.S.  carrier that is not offered to
similarly  situated U.S.  carriers  authorized to serve a particular route. With
the adoption of the WTO  Agreement  this year,  the FCC modified its  no-special
concessions  rule to prohibit  only those  exclusive  arrangements  granted by a
foreign correspondent with market power.

     In 1996,  the FCC amended the ISP to provide  carriers with  flexibility to
introduce  alternative  payment  arrangements  that  deviate  from  the ISP with
foreign  correspondents  in any  foreign  country  where the FCC has  previously
determined that effective competitive  opportunities ("ECO") exist.  Alternative
arrangements that deviate from the ISP also may be established for international
switched  traffic  between the U.S. and countries that have not previously  been
found to  satisfy  the ECO test  where the U.S.  carrier  can  demonstrate  that
deviation  from the ISP will promote  market-oriented  pricing and  competition,
while precluding abuse of market power by the foreign correspondent. As a result
of the WTO  Agreement,  the FCC has  replaced  the ECO  test  with a  rebuttable
presumption  in favor  of  alternative  payment  arrangements  with  WTO  member
countries.  While these rule changes may provide more flexibility to the Company
to respond more rapidly to changes in the global  telecommunications  market, it
will also provide similar flexibility to the Company's competitors.  The Company
intends,  where possible, to take advantage of lowered accounting rates and more
flexible settlement  arrangements.  On August 7, 1997, the FCC adopted revisions
to reduce the level and increase  enforcement  of its  international  accounting
"benchmark"  rates,  which are the FCC's  target  ceilings  for prices that U.S.
carriers  should pay to foreign  carriers for  terminating  U.S. calls overseas.
Certain  foreign  carriers have  challenged the FCC decision in court appeals as
well as petitions for reconsideration  filed with the FCC. If the FCC mandate of
benchmark  reductions  achieves  its  stated  goal of  establishing  competitive
international   settlement  rates,  the  Company  may  benefit  from  such  rate
reductions.

     Pursuant to FCC regulations, U.S. international telecommunications carriers
are  required to file copies of their  contracts  with  foreign  correspondents,
including operating  agreements,  with the FCC within 30 days of execution.  The
Company has filed each of its operating agreements with the FCC. The FCC's rules
also require the Company to file periodically a variety of reports regarding its
international  traffic  flows and use of  international  facilities.  The FCC is
engaged in a rulemaking  proceeding  in which it has proposed to reduce  certain
reporting  requirements of common carriers. The Company is unable to predict the
outcome of this proceeding or its effect on the Company.  The Company  currently
has on file with the FCC operating  agreements and accounting rate modifications
for India,  Syria,  Uganda and Monaco. In addition,  the Company has on file and
maintains with the FCC annual circuit status reports and traffic data reports.

    The FCC is currently  considering  whether to limit or prohibit the practice
whereby a carrier  routes,  through its facilities in a third  country,  traffic
originating  from one country and  destined  for  another  country.  The FCC has
permitted  third country  calling where all countries  involved  consent to this
type  of  routing  arrangements,  referred  to as  "transiting."  Under  certain
arrangements  referred to as "refiling," the carrier in the destination  country
does not consent to receiving traffic from the originating  country and does not
realize the traffic it receives from the third  country is actually  originating
from a  different  country.  The FCC to date  has  made no  pronouncement  as to
whether refile arrangements  comport either with U.S. or ITU regulations.  It is
possible that the FCC may determine  that  refiling,  as defined,  violates U.S.
and/or  international  law. To the extent that the  Company's  traffic is routed
through  a  third  country  to  reach  a  destination   country,   such  an  FCC
determination  with respect to  transiting  and  refiling  could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

                                       12
<PAGE>
     The FCC also  regulates  the ability of U.S.-based  international  carriers
affiliated with foreign carriers to serve markets where the foreign affiliate is
dominant.  Previously U.S.  carriers were required to report any investment by a
foreign  carrier  of 10% or  greater,  and  the  Company  has  reported  the 15%
investment  in the  Company by and  affiliate  of  Portugal  Telecom,  a foreign
carrier from a WTO member  country and a signatory to the WTO  Agreement.  Under
the  FCC's  new rules  implementing  the WTO  Agreement,  which  took  effect on
February 9, 1998 the 10% threshold  for requiring  reporting to the FCC has been
eliminated.  Now U.S.  carriers do not have to notify the FCC of foreign carrier
investment  unless it  exceeds  25%.  This  notification  is subject to a public
notice and comment period and FCC review to determine  whether the U.S.  carrier
should be  regulated  as  dominant  on routes  where the  foreign  affiliate  is
dominant. The FCC considers a foreign-affiliated  U.S. carrier to be dominant on
foreign  routes  where the foreign  affiliate  is a monopoly or has more than 50
percent  market  share  in  international  or local  telecommunications.  A U.S.
carrier  affiliated with a dominant foreign carrier may still obtain streamlined
entry into the U.S. if it agrees to be regulated as dominant on the routes where
the  foreign  affiliate  is from a WTO  member  country.  As a result of the WTO
Agreement,  the FCC has adopted a  rebuttable  presumption  in favor of entry by
foreign carrier  affiliates  from WTO member  countries.  The FCC's  liberalized
foreign  market entry  policies may have a two-fold  effect on the Company:  (i)
increased  opportunities for foreign  investment in and by the Company and entry
by the Company into WTO member countries; and (ii) increased competition for the
Company from other U.S.  international  carriers serving or seeking to serve WTO
member countries.

     The  FCC  may   condition,   modify  or  revoke  any  of  the  Section  214
authorizations  granted to the Company for violations of the Communications Act,
the FCC's rules and policies or the  conditions of those  authorizations  or may
impose monetary forfeitures for such violations.  Any such action on the part of
the FCC may have a material adverse effect on the Company's business,  financial
condition and results of operations.

     Interstate and Intrastate Services

     The Company's  provision of domestic  long  distance  service in the United
States is subject to regulation by the FCC and certain state PSCs,  who regulate
to varying degrees interstate and intrastate rates,  respectively,  ownership of
transmission facilities,  and the terms and conditions under which the Company's
domestic  services  are  provided.  In  general,  neither  the FCC nor the  PSCs
exercise direct oversight over cost  justification for domestic carriers' rates,
services or profit levels, but either or both may do so in the future.  Domestic
carriers  such  as the  Company,  however,  are  required  by  federal  law  and
regulations to file tariffs listing the rates,  terms and conditions  applicable
to their  interstate  services.  The Company has filed  domestic  long  distance
tariffs  with the FCC.  The FCC adopted an order on October  29, 1996  requiring
that  non-dominant  interstate  carriers,  such as the  Company,  eliminate  FCC
tariffs for domestic  interstate long distance  service.  This order was to take
effect as of December  1997. On February 13, 1997,  however,  the U.S.  Court of
Appeals  for the  District  of  Columbia  Circuit  ruled that the FCC's order be
stayed pending  judicial  review of appeals  challenging  the order.  Should the
appeals fail and the FCC's order become effective,  the Company may benefit from
the elimination of FCC tariffs by gaining more  flexibility and speed in dealing
with marketplace  changes.  The absence of tariffs,  however,  will also require
that the Company secure contractual agreements with its customers regarding many
of the terms of its existing tariffs or face possible claims arising because the
rights of the  parties  are no longer  clearly  defined.  To the extent that the
Company's  customer  base involves  "casual  calling"  customers,  the potential
absence of tariffs would require the Company to establish contractual methods to
limit potential  liability.  On August 20, 1997, the FCC partially  reconsidered
its order by  allowing  dial-around  carriers  such as the  Company to  maintain
tariffs on file with the FCC.

     In addition, the Company generally is also required to obtain certification
from the relevant state PSC prior to the initiation of intrastate service and to
file tariffs  with such states.  The Company  currently  has the  certifications
required to provide service in 34 states,  and has filed or is in the process of
filing requests for certification in 6 additional  states.  Although the Company
intends and expects to obtain operating  authority in each jurisdiction in which
operating  authority is required,  there can be no assurance that one or more of
these jurisdictions will not deny the Company's request for operating authority.
Any failure to maintain proper federal and state  certification  or tariffs,  or
any  difficulties or delays in obtaining  required  certifications  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.  Many states also impose various  reporting  requirements
and/or  require prior  approval for transfers of control of certified  carriers,
corporate  reorganizations,   acquisitions  of  telecommunications   operations,
assignments  of carrier  assets,  carrier  stock  offerings,  and  incurrence by
carriers  of  significant  debt  obligations.   Certificates  of  authority  can
generally be conditioned,  modified,  canceled,  terminated, or revoked by state
regulatory  authorities  for  failure to comply with state law and/or the rules,
regulations,  and policies of the PSCs.  Fines and other  penalties  also may be
imposed for such  violations.  Any such action by the PSCs could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.  The Company  monitors  regulatory  developments in all 50 states to
ensure regulatory compliance.

     Casual Calling Issues

     The FCC is  currently  engaged  in a  rulemaking  proceeding  to expand the
number of codes available for casual calling services. An increase in the number
of codes  available for casual  calling will allow for increased  competition in
the casual  calling  industry.  In  addition,  the FCC is  considering  rules to
require dominant local exchange carriers and competitive local exchange carriers
to make billing  arrangements  available on a nondiscriminatory  basis to casual
calling service providers.  The Company already has LEC billing  arrangements in
place but may wish to take  advantage  of rules the FCC may adopt to develop new
billing  arrangements  with competing LECs.  Competing casual calling  providers
without billing  arrangements  also would benefit from such a  nondiscriminatory
billing obligation.

     Other Legislative and Regulatory Initiatives

     The 1996 Act is designed to promote  local  competition  through  state and
federal  deregulation.  As part of its  pro-competitive  policies,  the 1996 Act
frees the RBOCs from the judicial orders that prohibited their provision of long
distance services outside of their operating  territories  (LATAs). The 1996 Act
provides  specific  guidelines  that  allow the RBOCs to provide  long  distance
inter-LATA service to customers inside the RBOC's region but not before the RBOC
has demonstrated to the FCC and state regulators that it has opened up its local
network  to  competition  and  met a  "competitive  checklist"  of  requirements
designed to provide competing network providers with nondiscriminatory access to
the RBOC's local network. To date, the FCC has denied applications for in-region
long distance  authority  filed by Ameritech  Corporation in Michigan

                                       13
<PAGE>
and SBC in  Oklahoma.  Bell  South  recently  filed a  similar  application  for
Mississippi.  The grant of such authority could permit RBOCs to compete with the
Company in the provision of domestic and international  long distance  services.
On December  31, 1997,  in striking  down an FCC order  concerning  certain RBOC
requests to enter the long distance  market,  a Federal  District Court in Texas
found unconstitutional  certain provisions of the 1996 Act restricting the RBOCs
from  offering  such  services  in their  operating  regions  until  they  could
demonstrate  that  their  networks  have  been  made  available  to  competitive
providers of local  exchange  service in those  regions.  The United  States and
several long distance companies have requested a stay of this decision and it is
expected that they,  and others,  will seek its reversal on appeal.  In the mean
time,  other similar FCC decisions  concerning other RBOCs may remain in effect.
The scope of the District Court Order, the timing of a ruling on the request for
stay and the timing of the ultimate resolution of the case are all uncertain. If
the District Court's decision ultimately is permitted to stand, it may result in
RBOC's providing  interexchange  service in their operating  regions sooner than
previously expected.

     The 1996 Act also contains  provisions  that will permit the FCC to forbear
from any provision of the  Communications  Act or FCC regulation  upon a finding
that  forbearance  will  promote   competition  and  that  the  carrier  seeking
forbearance does not possess market power. FCC forbearance  could reduce some of
the Company's  regulatory  requirements,  such as filing  specific rates for its
domestic interstate interexchange services.

     To  originate  and  terminate  calls in  connection  with  providing  their
services,  long  distance  carriers  such as the Company must  purchase  "access
services" from LECs or CLECs.  Access charges represent a significant portion of
the Company's cost of U.S. domestic long distance services and, generally,  such
access charges are regulated by the FCC for interstate  services and by PSCs for
intrastate  services.  The FCC has  undertaken  a  comprehensive  review  of its
regulation  of LEC access  charges to better  account for  increasing  levels of
local  competition.  Under  alternative  access  charge  rate  structures  being
considered by the FCC, LECs would be permitted to allow volume  discounts in the
pricing of access charges.  While the outcome of these proceedings is uncertain,
if these rate structures are adopted, many long distance carriers, including the
Company,   could  be  placed  at  a  significant  cost  disadvantage  to  larger
competitors.

Certain  additional  provisions  of the 1996 Act,  and the rules  that have been
proposed to be adopted pursuant thereto,  could materially affect the growth and
operation of the  telecommunications  industry and the services  provided by the
Company.  Further,  certain of the 1996 Act's  provisions  have been, and likely
will continue to be, judicially challenged. The Company is unable to predict the
outcome of such  rulemakings or litigation or the substantive  effect of the new
legislation and the rulemakings on the Company's  business,  financial condition
and results of operations.

     WTO Agreement on Basic Telecommunications

     In February 1997, the WTO announced that 69 countries, including the United
States,  Japan,  and  all of the  member  states  of the EU,  agreed  on the WTO
Agreement to facilitate  competition in basic  telecommunications  services. The
WTO Agreement  entered into force on February 5, 1998.  Pursuant to the terms of
the WTO  Agreement,  signatories  to the WTO Agreement have committed to varying
degrees to allow access to their domestic and international markets to competing
telecommunications  providers,  allow  foreign  ownership  interests in existing
telecommunications  providers  and establish  regulatory  schemes to develop and
implement policies to accommodate telecommunications competition.

     The FCC's new rules  implementing  the WTO Agreement,  which took effect on
February   9,   1998   generally   ease   restrictions   on  entry  by   foreign
telecommunications  carriers  from  WTO  member  countries  into  the  U.S.  and
streamline FCC regulation of such carriers.  Foreign entry restrictions and full
FCC  regulation  remain in effect for foreign  telecommunications  carriers from
non-WTO  countries.  The FCC's new policies  implementing the WTO Agreement also
address the viability of equivalency and other reciprocity  principles currently
applicable  to  international  facilities-based  and  resale  services,  foreign
ownership  limitations,   foreign  carrier  entry  into  the  U.S.  market,  and
accounting rate benchmarks. At the same time, telecommunications markets in many
foreign  countries  are  expected  to  be  significantly  liberalized,  creating
additional   competitive  market   opportunities  for  U.S.   telecommunications
businesses  such as the Company.  Although  many  countries  have agreed to make
certain changes to increase  competition in their respective markets,  there can
be no assurance that countries will enact or implement the legislation  required
to effect the changes to which they have committed in a timely manner or at all.
Failure by a country to meet  commitments  made under the WTO Agreement may give
rise to a cause of action for the  injured  foreign  countries  to lodge a trade
dispute with the WTO. At this time,  the Company is unable to predict the effect
the WTO Agreement and related developments might have on its business, financial
condition and results of operations.

EMPLOYEES

     As of December 31,  1997,  the Company had 70  full-time  employees  and 58
part-time employees.  None of the Company's employees are currently  represented
by a collective  bargaining  agreement.  The Company believes that its relations
with its employees are good.

   ITEM 2.   PROPERTIES

     The Company's  headquarters are located in approximately 27,700 square feet
of space in Bethesda, Maryland. The Company leases this space under an agreement
(which was  renegotiated  on October 27,  1997 and which  expires on October 31,
2002. The Company also is a party to a co-location  agreement  pursuant to which
it has the right to occupy certain space in  Washington,  D.C. as a site for its
switching facilities.  The Company recently entered into a co-location agreement
with another  party  pursuant to which it has the right to occupy  approximately
2,000 square feet in New York, New York as a site for its switching  facilities.
The  Washington,   D.C.  co-location  agreement  is  currently  renewable  on  a
month-to-month  basis, and the New York City co-location agreement has a term of
five years,  with a five-year  renewal option.  The Company  anticipates that it
will incur  additional  lease and  co-location  expenses  as it adds  additional
switching capacity

                                       14
<PAGE>
   ITEM 3.   LEGAL PROCEEDINGS

     The Company is from time to time involved in  litigation  incidental to the
conduct of its business.  The Company is not currently a party to any lawsuit or
proceeding  which,  in the opinion of  management,  is likely to have a material
adverse  effect on the  Company's  business,  financial  condition  or result of
operations.

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

     No matters were submitted to a vote of  shareholders  of the Company during
the fourth fiscal quarter of the fiscal year ended December 31, 1997.

                                     PART II

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

     Shares of the  Company's  Common  Stock,  par value  $0.01 per share,  were
initially  offered  to the  public on  October  9, 1997 at a price of $12.00 per
share. The common stock is quoted on the NASDAQ National Market under the ticker
symbol "STGC".  The following table sets forth, on a per share basis,  the range
of the high and low sale  prices for the common  stock as reported by the NASDAQ
National Market, for the periods indicated during the fiscal year ended December
31, 1997.  Such prices reflect  inter-dealer  prices,  without  retail  mark-up,
mark-down or commission, and do not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                                      HIGH            LOW
                                                                  -------------  --------------
<S>                                                               <C>              <C>
 Quarter Ended December 31, 1997 (from October 8, 1997)           $   22.375       $  14.500
</TABLE>


As of March 20, 1998, there were  approximately 43 stockholders of record of the
Company's common stock.

                                       15


<PAGE>
   ITEM 6.   SELECTED FINANCIAL DATA

     The following  table presents  selected  financial data for the Company for
the years ended December 31, 1993,  1994,  1995,  1996, and 1997. The historical
financial data as of December 31, 1994,  1995,  1996, and 1997 have been derived
from the  financial  statements of the Company which have been audited by Arthur
Andersen LLP, independent public accountants.  The financial data as of December
31, 1993 has been derived from the Company's unaudited financial statements in a
manner consistent with the audited financial  statements.  In the opinion of the
Company's   management,   these  unaudited  financial   statements  include  all
adjustments necessary for a fair presentation of such information. The following
information  should be read in conjunction with the Company's selected financial
statements  and  notes  thereto  presented   elsewhere  herein.  See  "Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." included herein.
<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                                   (IN THOUSANDS)
                                                ------------------------------------------------------
                                                    1993       1994       1995       1996       1997
                                                ----------- ---------- ---------- ---------- ---------
               STATEMENT OF OPERATIONS DATA:        (unaudited)

<S>                                                   <C>        <C>       <C>        <C>         <C>
  Net revenues................................    $  3,288   $  5,108  $  10,508  $  32,215   $ 85,857
  Cost of services............................       3,090      4,701      9,129     29,881     75,783
                                                ----------- ---------- ---------- ---------- ----------
     Gross margin.............................         198        407      1,379      2,334     10,074
  General and administrative expenses.........       1,491      1,159      2,170      3,996      6,288
  Selling and marketing expenses..............         232         91        184        514      1,238
  Depreciation and amortization...............          85         90        137        333        451
                                                ----------- ---------- ---------- ---------- ----------
     Income  (loss) from operations...........      (1,610)      (933)    (1,112)    (2,509)     2,097
  Interest expense............................          71         70        116        337        762
  Interest income.............................          13         24         22         16        313
                                                ----------- ---------- ---------- ---------- ---------
     Income (loss) before income tax                (1,668)      (979)    (1,206)    (2,830)     1,648
        Provision.............................
  Income tax provision                                  --         --         --         --         29
                                                ----------- ---------- ---------- ---------- ---------
  Net income (loss)                              $  (1,668)  $   (979) $  (1,206) $  (2,830)   $ 1,619
                                                =========== ========== ========== ========== =========
  PER SHARE DATA:
  Basic earnings (loss) per share.............   $   (0.36)  $  (0.21) $   (0.23)  $  (0.52)  $    0.26
                                                =========== ========== ========== ========== =========
  Weighted average common shares outstanding
            basic..........................           4,596     4,596      5,317      5,403      6,136
                                                =========== ========== ========== ========== ==========
  Diluted  earnings (loss) per share..........   $   (0.36)  $  (0.21)  $  (0.23) $   (0.52)  $    0.25
                                                =========== ========== ========== ========== =========
  Weighted average common and equivalent
      shares outstanding - diluted............       4,596      4,596      5,317      5,403      6,423
                                                =========== ========== ========== ========== =========
</TABLE>

<TABLE>
<CAPTION>

                                                                  AS OF DECEMBER 31,

                                                -------------------------------------------------------
                                                   1993       1994       1995       1996       1997
                                                   ----       ----       ----       ----       ----
                                               (unaudited)
<S>                                                    <C>        <C>        <C>        <C>     <C>
 BALANCE SHEET DATA:
  Cash and cash equivalents...................         194        257        528        148     $  26,114
  Working capital (deficit)...................      (2,097)    (3,295)    (3,744)    (6,999)     25,735
  Total assets................................       1,176      1,954      4,044      7,327     51,530
  Long-term obligations.......................         248          6        361        646        461
  Stockholders' equity (deficit)..............  $   (1,824)  $ (2,803)$   (3,259) $  (6,089) $  31,590

</TABLE>


                                       16

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

   The following  discussion and analysis of the financial condition and results
of  operations  should be read in  conjunction  with the  financial  statements,
related notes, and other detailed  information  included  elsewhere in this Form
10-K.  This  discussion,  including  the  Company's  plans and  strategy for its
business,  contains  forward-looking  statements  that involve certain risks and
uncertainties.  The Company's actual results could differ  materially from those
anticipated by the  forward-looking  statements as a result of certain  factors,
including,  but not limited to, dependence on operating  agreements with foreign
partners,   significant   foreign  and   U.S.-based   customers  and  suppliers,
availability  of  transmission   facilities,   U.S.  and  foreign   regulations,
international  economic  and  political  instability,  dependence  on  effective
billing and  information  systems,  customer  attrition and rapid  technological
change.  These  factors  should  not  be  considered  exhaustive;   the  Company
undertakes no obligation to release publicly the results of any future revisions
it may make to  forward-looking  statements to reflect  events or  circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

OVERVIEW

   The  Company  is  a  rapidly  growing,  facilities-based  international  long
distance  carrier  that has  implemented  a marketing  strategy to serve  ethnic
residential  markets  in the U.S.  and some of the  leading  international  long
distance  carriers.  The Company's  annual  revenues have increased over sixteen
fold over the last three  years from  approximately  $5.1  million  for the year
ended  December  31,  1994 to  approximately  $85.9  million  for the year ended
December 31, 1997. The Company's residential billing customers increased to over
71,500 for December 1997 compared to  approximately  6,300 for December 1994, as
measured  over a 30 day period.  Since its  inception  in 1989,  the Company has
focused its marketing efforts on the residential  consumer marketplace in ethnic
communities   in  which   management   believes  there  is  a  high  demand  for
international  long  distance  services.  To  achieve  the  economies  of  scale
necessary to maintain cost effective operations, the Company began reselling its
capacity  to  other  carriers  in  late  1995.  The  Company   currently  offers
U.S.-originated  long distance service  worldwide  through a flexible network of
owned and leased transmission  facilities and resale arrangements,  as well as a
variety of operating agreements and termination arrangements.

   Until  1995,  the  Company's  business  was  concentrated  in the New York to
Washington,  D.C.  corridor  and focused on the delivery of  dial-around  access
calling services to India. At the end of 1995, the Company expanded its customer
base to include the West Coast of the United States,  and began  targeting other
ethnic groups in the U.S.,  such as the Middle  Eastern,  Philippine and Russian
communities.  This  expansion  was  facilitated  by  utilizing  a portion of the
proceeds of the sale of stock to Blue Carol  Enterprises  Ltd.,  an affiliate of
Portugal Telecom International.  The Company supported this expansion by leasing
network  capacity  from other  domestic  telecommunications  companies,  thereby
experiencing  higher per-minute costs. In late 1995, the Company began to market
its international long distance services to other  telecommunications  carriers.
While providing greater utilization of its own network  facilities,  the carrier
group allowed the Company to build  relationships with other carriers,  which in
turn, led to additional termination options for its residential traffic.

   The  Company's  strategy is to serve its customers by building its own global
network,  which will allow the Company to  originate,  transmit,  and  terminate
calls utilizing  network capacity the Company manages.  The Company  anticipates
that this network expansion will allow it to achieve a per-minute cost advantage
over current arrangements.  As the Company transitions from leasing to owning or
managing its  facilities,  the Company's  management  believes  economies in the
per-minute cost of a call will be realized, while fixed costs will increase. The
facilities owned by the Company are, at this time, primarily  domestically based
and therefore  provide a cost advantage only with respect to origination  costs.
The Company  realizes a  per-minute  cost  savings  when it is able to originate
calls on network  facilities  it owns and manages  ("on net") versus calls which
must be originated  through the  utilization  of facilities the Company does not
own ("off net").  For the years ended December 31, 1996 and 1997,  approximately
44.9% and  59.8%,  respectively,  of the  Company's  residential  revenues  were
originated on net. As a higher percentage of calls are originated,  transmitted,
and terminated on the Company's own facilities, per-minute costs are expected to
decline, predicated on call traffic volumes.

   Revenues for  telecommunication  services are recognized as such services are
rendered,  net of an  allowance  for  revenue  that the Company  estimates  will
ultimately not be realized.  Revenues for return traffic  received  according to
the terms of the Company's operating agreements with foreign PTT's, as described
below,  are  recognized  as  revenue  as the  return  traffic  is  received  and
processed.  There can be no assurance that traffic will be delivered back to the
United States or what impact  changes in future  settlement  rates,  allocations
among  carriers or levels of traffic will have on net payments made and revenues
received and recorded by the Company.

   The Company's  cost of services  consists of  origination,  transmission  and
termination  expenses.  Origination  costs  include the amounts paid to LECs and
other domestic  telecommunication  network  providers in areas where the Company
does  not have its own  network  facilities.  Transmission  expenses  are  fixed
month-to-month  payments  associated  with  capacity  on  satellites,   undersea
fiber-optic cables, and other domestic and international  leased lines.  Leasing
this  capacity  subjects  the  Company  to price  changes  that are  beyond  the
Company's  control and to transmission  costs that are higher than  transmission
costs on the Company's owned network. As the Company builds its own transmission
capacity,  the risk associated with price fluctuations and the relative costs of
transmission are expected to decrease;  however,  fixed costs will increase.  In
addition,  adjustments  to the Company's  cost of services  which arise from the
resolution of billing disputes with other  telecommunication  network  providers
may have a  positive  impact  on  gross  margins  in any  particular  year.  The
Company's  experience  to date has been  that the  resolution  of such  disputes
occurs primarily in the fourth quarter of each year, and, therefore, the related
adjustments to cost of services may have a disproportionate impact on its fourth
quarter results of operations.

   Among its various foreign termination  arrangements,  the Company has entered
into  operating   agreements  with  a  number  of  foreign  PTTs,   under  which
international long distance traffic is both delivered and received.  Under these
agreements,  the foreign carriers are  contractually  obligated to adhere to the
policy of the FCC,  whereby  traffic from the foreign  country is routed through
U.S.  international  carriers,  such as the Company,  in the same  proportion as
traffic carried into the country ("return traffic").  Mutually exchanged traffic
between  the  Company  and  foreign  carriers  is  reconciled  through  a formal
settlement  arrangement at agreed upon rates. The Company records the amount due
to the foreign PTT as an expense in the period the traffic is  terminated.  When
the Company  receives return traffic in a future period,  the Company  generally
realizes a higher  gross

                                       17
<PAGE>
margin on the return  traffic as  compared to the lower  margin on the  outbound
traffic.  Return traffic  accounted for  approximately 3% and 2% of revenues for
the years ended December 31, 1996 and 1997, respectively.

   In addition to the operating  agreements,  the Company  utilizes  alternative
termination  arrangements  offered by third party vendors.  The Company seeks to
maintain  strong vendor  diversity for countries  where traffic  volume is high.
These vendor  arrangements  provide  service on a variable cost basis subject to
volume. These prices are subject to changes, generally upon seven-days notice.

   As the  international  telecommunications  marketplace has been  deregulated,
per-minute  prices have fallen and, as a consequence,  related  per-minute costs
for these  services  have also  fallen.  As a result,  the  Company has not been
adversely  affected by the price reductions,  although there can be no assurance
that this will continue.  Although the Company generated positive net income for
the year ended  December  31, 1997,  the Company  expects  selling,  general and
administrative  costs to increase as it develops  its  infrastructure  to manage
higher  business  volume.  Thus,  continued   profitability  is  dependent  upon
management's ability to successfully manage growth and operations.

     Results of Operations

     The following  table sets forth certain  financial  data as a percentage of
net revenues for the periods indicated.
<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                     ---------------------------------
                                                      1995         1996        1997
                                                     --------    ---------   ---------
  <S>                                                    <C>         <C>         <C>
      Net revenues...............................      100.0 %      100.0 %      100.0 %
   Cost of services..............................       86.9         92.8         88.3
                                                       -------    ---------   ---------
      Gross margin...............................       13.1          7.2         11.7
   General and administrative expenses...........       20.7         12.4          7.3
   Selling and marketing expenses................        1.8          1.6          1.4
   Depreciation and amortization.................        1.3          1.0          0.5
                                                     --------    ---------   ---------
       Income (loss) from operations.............      (10.7)        (7.8)         2.5
   Interest expense..............................       (1.1)        (1.1)        (0.9)
   Interest income...............................        0.2          0.1          0.3
                                                     --------    ---------   ---------
      Income (loss) before income tax provision..      (11.6)        (8.8)         1.9
   Income tax provision..........................         --           --           --
                                                     ========    =========   =========
      Net income (loss)..........................      (11.6) %      (8.8) %       1.9 %
                                                     ========    =========   =========
</TABLE>

1997 COMPARED TO 1996

     Net Revenues.  Net revenues for the year ended  December 31, 1997 increased
approximately  $53.7  million or 166.8 %, to  approximately  $85.9  million from
$32.2  million  for the  year  ended  December  31,  1996.  Residential  revenue
increased in comparative  periods by approximately  $16.6 million or 138.3%,  to
approximately   $28.6  million  for  the  year  ended  December  31,  1997  from
approximately  $12.0 million in 1996. The increase in residential revenue is due
to an increase in  residential  customers to over 71,500 for December  1997 from
approximately  28,000 for  December  1996.  Carrier  revenue  for the year ended
December  31,  1997  increased   approximately   $37.1  million  or  183.7%,  to
approximately  $57.3 million from approximately $20.2 million for the year ended
December 31, 1996.  The increase in carrier  revenues is due to the execution of
the  Company's  strategy to optimize its capacity on its  facilities,  which has
resulted  in  sales to  additional  carrier  customers  and  increased  sales to
existing carrier customers.

     Gross  Margin.  Gross  margin  increased   approximately  $7.7  million  to
approximately   $10.0  million  for  the  year  ended  December  31,  1997  from
approximately  $2.3 million for the year ended  December 31, 1996.  Gross margin
improved as a percentage of net revenues for the year ended December 31, 1997 to
11.7%  from 7.2% for the year  ended  December  31,  1996.  The gross  margin on
residential revenue increased to approximately 14.9% for the year ended December
31, 1997 from  approximately  10.1% for the year ended December 31, 1996, due to
an increase in the  percentage  of  residential  traffic  originated  on net and
improved  termination  costs.  In the year ended  December  31,  1997,  59.8% of
residential  traffic  originated  on net as compared to 44.9% for the year ended
December 31, 1996.

     The reported gross margin for the year ended December 31, 1997 and December
31,  1996  includes  the effect of  accrued  disputed  charges of  approximately
$67,000 and $1.4 million  respectively,  which represents less than 1% and 5% of
reported net revenues.

     General and  Administrative.  General and  administrative  expenses for the
year ended  December 31, 1997 increased  approximately  $2.3 million or 57.5% to
approximately  $6.3 million  from $4.0  million for the year ended  December 31,
1996.  As a percentage  of net  revenues,  general and  administrative  expenses
declined to 7.3% from 12.4% for the respective  periods.  The increase in dollar
amounts was  primarily  due to an increase in  personnel  to 128 at December 31,
1997 from 54 at  December  31,  1996,  and to a lesser  extent,  an  increase in
billing processing fees.

                                       18

<PAGE>
     Selling and  Marketing.  Selling and marketing  expenses for the year ended
December 31, 1997 increased  approximately  $700,000 or 140.0 % to approximately
$1.2 million from  approximately  $514,000 for the year ended December 31, 1996.
As a percentage of net revenues,  selling and marketing expenses declined to 1.4
% from 1.6 % in the  respective  periods.  The  increase  in dollar  amounts  is
primarily due to the Company's efforts to market to new customer groups.

     Depreciation and Amortization.  Depreciation and amortization  expenses for
the year ended  December  31, 1997  increased  to  approximately  $451,000  from
approximately  $333,000 for the year ended  December 31, 1996,  primarily due to
increases  in  capital  expenditures  pursuant  to  the  Company's  strategy  of
expanding its network infrastructure.

     Interest.  Interest  expense for the year ended December 31, 1997 increased
to  approximately  $762,000  from  approximately  $337,000  for the  year  ended
December 31, 1996,  as a result of  additional  debt  incurred by the Company to
fund expansion and working capital needs.

     Net Income.  Net Income was approximately  $1.6 million in 1997 as compared
to a net loss of approximately $2.8 million in 1996.


1996 COMPARED TO 1995

     Net Revenues.  Net revenues for the year ended  December 31, 1996 increased
approximately  $21.7  million or 206.7 %, to  approximately  $32.2  million from
$10.5  million  for the  year  ended  December  31,  1995.  Residential  revenue
increased in comparative  periods by  approximately  $6.6 million or 122.2 %, to
approximately  $12.0 million in 1996 from $5.4 million in 1995.  The increase in
residential revenue is due to a concerted effort to expand marketing to the West
Coast and to target  additional  ethnic  communities such as the Middle Eastern,
Philippine,  and Russian  communities.  The Company's  residential customer base
grew to  approximately  27,800  customers  as of  December  31, 1996 from 10,700
customers as of December 31, 1995. Carrier revenue increased approximately $15.1
million  or 296.1 % to $20.2  million in 1996 from $5.1  million  in 1995.  This
growth is a result of the Company's strategy to optimize network  utilization by
offering  its  services  to other  carriers.  In this  regard,  the  Company was
successful  in  expanding  its  marketing  and  increased  sales  to  first  and
second-tier carriers.  Return traffic decreased to approximately $1.1 million in
1996 from $2.0  million in 1995.  Net  revenues  in 1995  reflect the receipt of
previously undelivered return traffic revenues to the Company.

     Gross Margin. Gross margin increased approximately $900,000 to $2.3 million
for the year  ended  December  31,  1996 from $1.4  million  for the year  ended
December 31,  1995.  Gross  margin  declined as a percentage  of net revenues to
approximately  7.2 % for the year ended  December  31,  1996 from 13.1 % for the
year ended December 30, 1995. The gross margin on residential  revenue decreased
to  approximately  10.1  percent  in 1996  from  10.4 % in 1995  due to  initial
expenses  associated  with the  entry  into  new  markets.  As a  result  of the
expansion  into  additional  ethnic  markets and new  geographic  areas,  on net
origination  declined to approximately  44.9 % in 1996, as compared to 62.9 % in
1995.  The relative  decrease in on net  originated  traffic was due to customer
base growth  prior to the  expansion of owned or managed  facilities.  The gross
margin on carrier revenue,  excluding return traffic, increased to approximately
negative 0.02 % in 1996 from negative 36.9 % in 1995.

     General and  Administrative.  General and  administrative  expenses for the
year ended December 31, 1996 increased  approximately $1.8 million or 81.8 %, to
$4.0  million  from $2.2  million for the year ended  December  31,  1995.  As a
percentage  of net revenues,  general and  administrative  expenses  declined to
approximately  12.4% from 20.7% for the  respective  periods.  The  increase  in
dollar amounts was primarily due to increased third party billing and collection
fees of  approximately  $349,000 to support  higher  calling  volume;  increased
personnel expenses to $1.5 million in 1996 from $1.1 million in 1995 as a result
of new hires; and bad debt losses of approximately  $529,000 attributable to the
bankruptcy of one former customer.

     Selling and  Marketing.  Selling and marketing  expenses for the year ended
December  31,  1996  increased  to  approximately  $514,000  from  approximately
$184,000 for the year ended  December 31, 1995. As a percentage of net revenues,
selling and  marketing  expenses  declined to 1.6 % from 1.8% in the  respective
periods. The increase in dollar amounts is attributable to the Company's efforts
to enter additional ethnic markets and new geographic areas.

     Depreciation and Amortization.  Depreciation and amortization expenses grew
to  approximately  $333,000  in 1996 from  $137,000  in 1995,  primarily  due to
increased capital expenditures.

     Interest.  Interest expense  increased to  approximately  $337,000 for 1996
from  $116,000 in 1995,  primarily  due to increased  borrowings  under a credit
facility  to support  growth in  accounts  receivable,  and to a lesser  extent,
increased borrowings from related and other parties.

     Net Loss. The Company  experienced a net loss of approximately $2.8 million
in 1996 as compared to a net loss of $1.2 million in 1995.


                                       19

<PAGE>
      QUARTERLY RESULTS OF OPERATIONS

     The following table sets forth certain unaudited  quarterly  financial data
for each of the  quarters in the years ended  December  31, 1996 and 1997.  This
quarterly  information  has been derived from and should be read in  conjunction
with the Company's financial statements and the notes thereto included elsewhere
in this Form 10-K,  and,  in  management's  opinion,  reflects  all  adjustments
(consisting only of normal recurring  adjustments,  except as discussed in Notes
(B)  and  (C)  below)  necessary  for a fair  presentation  of the  information.
Operating results for any quarter are not necessarily  indicative of results for
any future period.
<TABLE>
<CAPTION>
                                                                  QUARTERS ENDED
                                    ----------------------------------------------------------------------------
                                                     1996                                 1997
                                    -------------------------------------- -------------------------------------
                                     MAR. 31,  JUNE 30,  SEPT. 30, DEC. 31,  MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
 <S>                                 <C>       <C>       <C>       <C>      <C>     <C>       <C>     <C>
 Net revenues........................ $ 4,722  $ 8,485   $ 7,652  $ 11,356  $ 12,372 $16,464  $ 25,757 $31,264
  Cost of services...................   4,467     7,922    6,763    10,729    10,765  14,485    22,668  27,865
                                     -------- --------- --------- --------- -------- ------- --------- -------
      Gross margin (B) (C)...........    255       563       889       627     1,607   1,979     3,089   3,399
 General and  administrative
      expenses (B)...................    595       778     1,370     1,253     1,151   1,310     1,820   2,007
 Selling and marketing expenses......     52       101       166       195      104     202       391     541
 Depreciation and amortization.......     52        93        93        95       96     118       140      97
                                     -------- --------- --------- --------- -------- ------- --------- -------
      Income (loss) from operations..   (444)     (409)     (740)     (916)      256     349       738     754
 Interest expense....................     58        60        80       139       117     135       326     184
 Interest income.....................      5         4         5         2         1       4         9     299
                                     -------- --------- --------- --------- -------- ------- --------- -------
      Income (loss) before income
          tax provision..............   (497)     (465)     (815)   (1,053)      140     218       421     869
 Income tax provision.................   --        --        --        --          3       4         8      14
                                     ======== ========= ========= ========= ======== ========= ======== ======
      Net income (loss)..............$  (497)   $ (465)   $ (815)  $(1,053)  $   137   $ 214    $  413   $ 855
                                     ======== ========= ========= ========= ======== ======= ========= =======
  Basic earnings (loss) per share
      (A)........................... $ (0.09)   $(0.09)   $(0.15)   $(0.19)  $  0.03  $ 0.04    $ 0.08   $0.10
                                    ======== ========= ========= ========= ======== ======= ========= =======
  Weighted average common shares
      outstanding - basic (A).......   5,403     5,403     5,403     5,403     5,403   5,403     5,403   8,324
                                     ======== ========= ========= ========= ======== ======= ========= =======
  Diluted earnings (loss) per share
      (A)............................ $(0.09)   $(0.09)   $(0.15)   $(0.19)    $0.03   $0.04     $0.07   $0.10
                                     ======== ========= ========= ========= ======== ======= ========= =======
 Weighted average common shares
      and equivalent - diluted (A)..  5,403     5,403     5,403     5,403     5,474   5,646     5,760   8,709
                                     ======== ========= ========= ========= ======== ======= ========= =======
</TABLE>

   (A)  The earnings  (loss) per share  amounts have been restated in accordance
        with SAB No. 98 and SFAS No. 128. Quarterly per share data may not total
        to annual per share data due to  changes in shares  outstanding  for the
        periods.  The increase in weighted  shares in the fourth quarter of 1997
        is due to the Company's initial public offering in October 1997.

   (B)  Vendor  disputes  and other  disputed  charges  resolved  in the  fourth
        quarter of 1997  resulted in net credits as estimated by  management  of
        approximately  $300,000 recognized as lower cost of services and general
        and administrative expenses.

   (C)  During the first quarter of 1997, the Company's gross margin improved by
        approximately  $1.0  million  over  the  fourth  quarter  of  1996.  The
        improvement  was due to (i)  approximately  $500,000 in costs accrued in
        the fourth quarter 1996 for disputed  vendor  obligations as compared to
        approximately  $8,000 in costs accrued during the first quarter of 1997;
        (ii) approximately $400,000 of cost reductions in 1997 resulting from an
        increase in the  utilization of  alternative  termination  options;  and
        (iii) to a lesser  extent,  an increase in the percentage of residential
        traffic originated on net.

         LIQUIDITY AND CAPITAL RESOURCES

   The  Company's  liquidity  requirements  arise  from cash  used in  operating
activities,   purchases  of  network  equipment,  and  payments  on  outstanding
indebtedness.  The  Company  has  financed  its  growth  through  capital  lease
financing, notes payable from individuals,  and a credit and billing arrangement
with a third party  company  prior to July 1, 1997.  This  facility  allowed the
Company  to receive  advances  of 70 % of all  records  submitted  for  billing,
subject to a credit  limit of $3 million.  Subsequent  to July 1, 1997 until the
Offering,  the Company  primarily  financed its growth  through a bank loan (the
"Loan"),  which  provides for maximum  borrowings  of up to $10 million  through
December  31, 1997,  and the lesser of $15 million or 85 % of eligible  accounts
receivable,  as defined,  thereafter  until  maturity on December 31, 1999.  The
Company may elect to pay quarterly  interest  payments at the prime rate, plus 2
%, or the adjusted LIBOR,  plus 4 %. The Loan is secured by substantially all of
the Company's assets. It contains certain financial and non-financial covenants,
including,  but not limited to,  ratios of monthly net revenue to loan  balance,
interest coverage, and cash flow leverage,  minimum subscribers,  limitations on
capital  expenditures,  additional  indebtedness,  acquisition  or  transfer  of
assets,  payment  of  dividends,  new  ventures  or  mergers,  and  issuance  of
additional  equity.  The Company is currently in  compliance  with all financial
ratios and covenants of the Loan. Beginning on January 1, 1998 (and extending to
July 1, 1998 upon the occurrence of defined  events),  should the Bank determine
and assert based on its reasonable  assessment that a material adverse change to
the Company  has  occurred,  it could  declare  all  amounts  outstanding  to be
immediately due and payable.

   Although  management has no definitive  plans to extinguish the Loan, if such
an event were to occur in 1998,  the  Company  would  record a  non-cash  charge
related  to  the  unamortized  deferred  debt  financing  costs,  which  totaled
approximately $950,000 as of December 31, 1997.

                                       20

<PAGE>
   In October  1997,  the Company  completed an initial  public  offering of its
common stock (the  "Offering").  Together with the exercise of the overallotment
option in November 1997, the Offering placed 3,277,500 shares of common stock at
a  price  of  $12.00  per  share,  yielding  net  proceeds  (after  underwriting
discounts,   commissions,  and  other  professional  fees)  to  the  Company  of
approximately  $35.0  million.  The  Company  used a portion of its  proceeds to
acquire   cable   facilities,   switching,   compression,   and  other   related
telecommunications equipment. Proceeds were also used for marketing programs, to
pay down amounts due under the Loan, for working capital,  and general corporate
purposes.  As a result,  the Company's  cash and cash  equivalents  increased to
$26.1 million at December 31, 1997 from $148,000 at December 31, 1996.  Net cash
used in operating  activities was approximately  $1.7 million for the year ended
December  31,  1997,  as compared to net cash used in  operating  activities  of
approximately $1.4 million for the year ended December 31, 1996. The increase in
cash used in operations was the result of the significant growth in net revenues
and the corresponding accounts receivable for the period.

   Net cash used in  investing  activities  was  approximately  $3.9 million and
$520,000 for the year ended December 31, 1997 and 1996,  respectively.  Net cash
used in investing  activities  for the year ended  December  31, 1997  primarily
related  to  capital   expenditures   made  to  expand  the  Company's   network
infrastructure.

   Net cash provided by financing activities was approximately $31.6 million and
$1.5 million for the year ended December 31, 1997 and 1996,  respectively.  Cash
provided by financing  activities for the year ended December 31, 1997 primarily
resulted from net proceeds from the Offering, as previously discussed, offset by
the repayment of amounts under the  receivables-based  credit facility,  capital
lease obligations, and various notes payable. Any borrowings under the Loan were
repaid by December 31, 1997.

   The Company is continuing to pursue a flexible approach to expand its markets
and enhance its network  facilities by investing in marketing,  and in switching
and  transmission  facilities,  where  anticipated  traffic volumes justify such
investments. Historically, the Company has achieved market penetration with only
modest  investments  in marketing.  There can be no assurance that the Company's
prior  marketing   achievements  can  be  replicated  with  increased  marketing
investments.  A number of factors,  including market share, competitor rates and
quality of service determine the effectiveness of the market entry strategy.

   The Company has planned capital  expenditures  through 1998 of $19.2 million.
Additionally,  marketing  expenditures  for 1997 and 1998 are  expected to reach
$4.5 million in aggregate.  These  expenditure needs are expected to be met from
operations,  amounts available under the Loan, and the proceeds of the Offering.
These capital needs will continue to expand as the Company executes its business
strategy.

   As it relates to the Year 2000,  management of the Company is taking steps to
assess  the nature  and  extent of the  impact of Year 2000 on its  systems  and
applications.  While management has not yet finalized, its analysis, it does not
expect  that the  costs to make its  systems  Year  2000-compliant  will  have a
material adverse effect on its results of operations or financial position. Such
costs will be expensed as incurred.

   The Company has accrued  approximately  $2.1 million as of December 31, 1997,
for  disputed  vendor  obligations  asserted  by one of  the  Company's  foreign
carriers  for  minutes  processed  in excess  of the  minutes  reflected  on the
Company's  records.  If the Company  prevails in its disputes,  these amounts or
portions  thereof would be credited to  operations in the period of  resolution.
Conversely,  if the Company does not prevail in its  disputes,  these amounts or
portions thereof may be paid in cash.

         NEW ACCOUNTING STANDARDS

   In June 1997, the Financial  Accounting  Standards Board issued SFAS No. 130,
"Reporting  Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." The Company is required to adopt both
of these standards for the year ending December 31, 1998.

   SFAS No. 130 requires  "comprehensive  income" and the  components  of "other
comprehensive  income", to be reported in the financial  statements and/or notes
thereto.  As the  Company  does not  currently  have any  components  of  "other
comprehensive  income" it is not expected  that this  statement  will affect the
Company's financial statements.

   SFAS  No.  131  requires  entities  to  disclose  financial  and  descriptive
information  about  its  reportable  operating  segments.  It  also  establishes
standards for related disclosures about products and services, geographic areas,
and major  customers.  The Company is in the process of assessing the additional
disclosures,  if any, required by SFAS No. 131. However,  such adoption will not
impact the  Company's  results of  operations  or financial  position,  since it
relates only to disclosures.

         EFFECTS OF INFLATION

     Inflation is not a material factor affecting the Company's business and has
not had a significant effect on the Company's operations to date.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

       Not  applicable.

                                       21
<PAGE>
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     INDEX TO FINANCIAL STATEMENTS

                                                                          PAGE
                                                                          ----

 Report of Independent Public Accountants.................................  23
 Statements of Operations for the years ended
       December 31, 1995, 1996 and 1997...................................  24

 Balance Sheets as of December 31, 1996 and 1997..........................  25

 Statements of Changes in Stockholders' Equity
   (Deficit) for the years ended December 31, 1995, 1996 and 1997.........  26

 Statements of Cash Flows for the years ended December 31, 1995,
    1996 and 1997.........................................................  27

 Notes to Financial Statements............................................  28

                                       22


<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Startec Global Communications Corporation:

     We  have  audited  the  accompanying   balance  sheets  of  Startec  Global
Communications  Corporation (a Maryland corporation) as of December 31, 1996 and
1997, and the related statements of operations,  changes in stockholders' equity
(deficit),  and cash  flows  for each of the  three  years in the  period  ended
December 31, 1997.  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 an 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 financial statements referred to above present fairly,
in  all  material   respects,   the   financial   position  of  Startec   Global
Communications Corporation, as of December 31, 1996 and 1997, and the results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles.

                                                 ARTHUR ANDERSEN LLP

Washington, D.C. ,
March 4, 1998


<PAGE>
                    STARTEC GLOBAL COMMUNICATIONS CORPORATION
                            STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                 -------------------------------------------
                                                    1995            1996            1997
                                                 -----------     -----------     -----------
<S>                                             <C>               <C>          <C>
  Net  revenues................................ $     10,508      $  32,215    $     85,857
  Cost of services.............................       9,129          29,881          75,783
                                                 -----------     -----------     -----------
        Gross margin...........................       1,379           2,334          10,074
  General and administrative expenses..........       2,170           3,996           6,288
  Selling and marketing expenses ..............         184             514           1,238
  Depreciation and amortization................         137             333             451
                                                 -----------     -----------     -----------
        Income (loss) from operations..........      (1,112)         (2,509)          2,097
  Interest expense.............................         116             337             762
  Interest income..............................          22              16             313
                                                 -----------     -----------     -----------
        Income (loss) before income tax
        provision..............................      (1,206)         (2,830)          1,648
  Income tax provision.........................          --              --              29
                                                 -----------     -----------     -----------
  Net income (loss)............................  $   (1,206)     $   (2,830)      $   1,619
                                                 ===========     ===========     ===========
  Basic earnings (loss) per share..............  $    (0.23)     $    (0.52)      $    0.26
                                                 ===========     ===========     ===========
  Weighted average common shares outstanding -
      basic....................................       5,317           5,403           6,136
                                                ===========     ===========     ===========
  Diluted  earnings (loss) per share...........  $    (0.23)     $    (0.52)     $     0.25
                                                 ===========     ===========     ===========
  Weighted average common and equivalent shares
      outstanding - diluted....................       5,317           5,403           6,423
                                                 ===========     ===========     ===========
</TABLE>

       The accompanying notes are an integral part of these statements.

                                       24
<PAGE>
                    STARTEC GLOBAL COMMUNICATIONS CORPORATION
                                 BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                             ------------------------
                                     ASSETS                                       1996         1997
                                                                             -----------  -----------
RRENT ASSETS:
<S>                                                                            <C>           <C>
 Cash and cash equivalents...........................................          $     148     $ 26,114
 Accounts receivable, net of allowance for doubtful
 accounts of  approximately $1,079 and $2,353,  respectively.........              5,334       16,980
 Accounts receivable, related party..................................                 78          377
 Other current assets................................................                211        1,743
                                                                             -----------  -----------
      Total current assets...........................................              5,771       45,214
                                                                             -----------  -----------
PROPERTY AND EQUIPMENT:
 Long distance communications equipment..............................              1,773        3,305
 Computer and office equipment.......................................                392        1,024
 Less - Accumulated depreciation and amortization....................               (789)      (1,240)
                                                                             -----------  -----------
                                                                                   1,376        3,089
                                                                                      --        2,095
 Construction in progress............................................        -----------  -----------
    Total property and equipment, net................................              1,376        5,184
                                                                             -----------  -----------
Deferred debt financing costs, net...................................                --           952
stricted cash........................................................                180          180
                                                                             -----------  -----------
     Total assets....................................................         $    7,327   $   51,530
                                                                             ===========  ===========
                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)c
CURRENT LIABILITIES:
   Accounts payable..................................................         $    7,171      $15,420
        Accrued expenses.............................................              2,858        3,728
   Short-term borrowings under receivables-based credit facility.....              1,812           --
   Capital lease obligations.........................................                226          331
   Notes payable to related parties..................................                 53           --
   Notes payable to individuals and other............................                650          --
                                                                             -----------  -----------
     Total current liabilities.......................................             12,770       19,479
                                                                             -----------  -----------
Capital lease obligations, net of current portion....................                546          417
Notes payable to related parties, net of current portion.............                100           --
Notes payable to individuals and other, net of current portion.......                 --           44
                                                                             -----------  -----------
     Total liabilities...............................................             13,416       19,940
                                                                             -----------  -----------
MMITMENTS AND CONTINGENCIES (NOTE 8)
OCKHOLDERS' EQUITY (DEFICIT):
 Preferred stock,  $1.00 par value, 100,000 shares authorized;
 no shares issued  and outstanding...........................................         --           --
  Voting common stock, $0.01 par value; 10,000,000 shares authorized at December
    31, 1996; 20,000,000 shares authorized at December 31, 1997; 5,380,824 shares
    issued and outstanding at December 31, 1996; 8,811,999 shares issued and
    outstanding at December 31, 1997.................................                 54           88
 Nonvoting common stock,  $1.00  par value; 25,000 shares authorized; 22,526
   shares issued and outstanding at December 31, 1996; no shares issued and
   outstanding at December 31, 1997...................................                22           --
 Additional paid-in capital..........................................                932       35,528
 Warrants............................................................                 --        1,693
 Unearned compensation...............................................                 --         (241)
 Accumulated deficit ................................................             (7,097)      (5,478)
                                                                             -----------  -----------
 Total stockholders' equity (deficit)................................             (6,089)      31,590
                                                                             -----------  -----------
 Total liabilities and stockholders' equity (deficit)................        $     7,327     $ 51,530
                                                                             ===========  ===========
</TABLE>

      The accompanying notes are an integral part of these balance sheets.

                                       25
<PAGE>
                    STARTEC GLOBAL COMMUNICATIONS CORPORATION
             STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                      VOTING            NONVOTING
                                   COMMON STOCK        COMMON STOCK     ADDITIONAL
                                 ------------------ -------------------  PAID-In                  UNEARNED     ACCUMULATED
                                 SHARES    AMOUNT    SHARES    AMOUNT    CAPITAL    WARRANTS    COMPENSATION     DEFICIT    TOTAL
                                 ------    ------    ------    ------    -------    --------    ------------     -------    -----
<S>                                <C>    <C>         <C>  <C>         <C>       <C>           <C>           <C>
Balance at December 31, 1994....   4,574  $  46       22  $      22     $ 190   $    --          $ --     $    (3,061)  $ (2,803)
       Net loss.................      --     --       --         --        --        --            --          (1,206)    (1,206)
Issuance of common stock........     807      8       --         --       742        --            --              --        750
                                 ------- ------  ------- -------- ----------- -------- -------------      -----------   --------
Balance at December 31, 1995....   5,381     54       22         22       932        --            --          (4,267)    (3,259)
     Net loss...................      --     --      --          --        --        --            --          (2,830)    (2,830)
                                 ------- ------  -------   -------- ----------- -------- -------------    -----------   --------
Balance at December 31, 1996....   5,381     54       22         22       932        --            --          (7,097)    (6,089)
      Net  income...............     --     --       --         --        --        --            --            1,619      1,619
   Conversion of nonvoting
     common shares to voting
     common shares..............      17     --      (17)       (17)       17        --            --              --         --
   Purchase and retirement of
     nonvoting common shares....      --     --       (5)        (5)      (40)       --            --              --        (45)
   Net proceeds from initial
     public offering,..........    3,278     33       --         --    34,961        --            --              --     34,994
   Exercise of employee stock
     options....................     136      1       --         --       143        --            --              --        144
   Unearned compensation
     pursuant to issuance  of
     stock options..............      --     --       --         --       385        --          (385)             --         --
   Amortization of unearned
     compensation...............      --     --       --         --        --        --           144              --        144
   Warrants issued in
     connection with equity
     ($870) and debt placement
     ($823) ....................      --     --       --        --       (870)       1,693        --             --         823
                                 ======= =========-======= ======= =========== =========== =============  ===========   ========
Balance at December 31, 1997....   8,812 $   88       --  $     -- $   35,528   $    1,693    $  (241)   $     (5,478)   $31,590
                                 ======= ========= ======= ======= =========== =========== =============  ===========    =======
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       26
<PAGE>
                    STARTEC GLOBAL COMMUNICATIONS CORPORATION
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                                 -------------------------------
                                                                    1995        1996        1997
                                                                  --------- ----------- --------
<S>                                                               <C>        <C>         <C>
  OPERATING ACTIVITIES:
     Net income (loss)   ........................................ $ (1,206)  $ (2,830)   $  1,619
     Adjustments to net income (loss) :
        Depreciation and amortization............................      137        333         451
        Compensation pursuant to stock options ..................       --         --         144
        Amortization of deferred debt financing costs and debt
        discounts................................................       --         --         237
       Changes in operating assets and liabilities:
        (Increase) decrease in assets:
          Accounts receivable, net...............................   (1,342)    (3,113)    (11,646)
          Accounts receivable, related party.....................      (46)       241        (299)
          Other current assets...................................      (83)       (80)       (429)
        Increase (decrease) in liabilities:
          Accounts payable ......................................    1,135      2,515      8,249
          Accrued expenses.......................................      637      1,578         (45)
                                                                 --------- ----------   ---------
               Net cash used in operating activities.............     (768)    (1,356)     (1,719)
                                                                 ---------  ---------   ---------
  INVESTING ACTIVITIES:
      Purchases of property and equipment........................     (200)      (520)     (3,881)
                                                                 ----------  --------    --------
              Net cash used in investing activities..............     (200)      (520)     (3,881)
                                                                  ---------   -------    --------
  FINANCING ACTIVITIES:
      Net borrowings (repayments) under receivables-based credit
         facility................................................      570      1,242      (1,812)
      Repayments under capital lease obligations ................      (96)       (91)       (402)
      Repayments under notes payable to related parties .........       --         (5)       (153)
      Borrowings under notes payable to individuals  and other...       50        475          --
      Repayments under notes payable to individuals  and other...      (35)      (125)       (650)
      Payments of debt financing costs...........................       --         --        (366)
      Net proceeds from issuance of common stock.................      750         --      34,994
      Purchase and retirement of nonvoting common stock..........       --         --         (45)
                                                                 ---------   --------    --------
       Net cash provided by financing activities ................    1,239      1,496      31,566
                                                                 ---------   --------    --------
       Net increase (decrease) in cash and cash equivalents......      271       (380)     25,966
                                                                 ---------   --------    --------
       Cash and cash equivalents at the beginning of the period        257       528          148
                                                                 ---------   --------    --------
     Cash and cash equivalents at the end of  the period ........ $    528    $   148  $   26,114
                                                                  ========   ========    ========
  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid................................................. $     87    $   296  $      591
                                                                    =======  ========    ========
   Income taxes paid............................................. $     --    $    --  $      19
                                                                    ======   ========    ========
  SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
   Equipment acquired under capital lease........................ $    285    $   524  $      378
   Accrued expenses converted to a note..........................       --         --          44
   In 1997, the Company recorded $1,103 in "Other current assets",
     $959 in  accrued  expenses  and $144 in  equity,  related  to
     options  exercised through December 31, 1997. This amount was
     collected in January 1998 (Note 2).
</TABLE>

        The accompanying notes are an integral part of these statements.

                                     27

<PAGE>
                    STARTEC GLOBAL COMMUNICATIONS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

1. BUSINESS DESCRIPTION:

ORGANIZATION

   Startec Global Communications  Corporation (the "Company",  formerly Startec,
Inc.),  is a  Maryland  corporation  founded  in 1989 to  provide  long-distance
telephone services. The Company currently offers  U.S.-originated  long-distance
service to residential and carrier customers through a flexible network of owned
and leased transmission facilities, resale arrangements, and foreign termination
arrangements. The Company's marketing targets specific ethnic residential market
segments  in  the  United   States  that  are  most  likely  to  seek   low-cost
international   long-distance  service  to  specific  and  identifiable  country
markets. The Company is headquartered in Bethesda, Maryland.

INITIAL PUBLIC OFFERING

   In October  1997,  the Company  completed an initial  public  offering of its
common stock (the  "Offering").  Together with the exercise of the overallotment
option in November 1997, the Offering placed 3,277,500 shares of common stock at
a  price  of  $12.00  per  share,  yielding  net  proceeds  (after  underwriting
discounts,   commissions,  and  other  professional  fees)  to  the  Company  of
approximately $35.0 million.

RISKS AND OTHER IMPORTANT FACTORS

   The Company is subject to various risks in  connection  with the operation of
its  business.  These  risks  include,  but are not limited  to,  dependence  on
operating  agreements with foreign partners,  significant foreign and U.S.-based
customers and  suppliers,  availability  of  transmission  facilities,  U.S. and
foreign   regulations,   international   economic  and  political   instability,
dependence on effective billing and information systems, customer attrition, and
rapid technological  change. Many of the Company's competitors are significantly
larger  and have  substantially  greater  financial,  technical,  and  marketing
resources  than the Company;  employ  larger  networks and control  transmission
lines; offer a broader portfolio of services; have stronger name recognition and
loyalty;  and  have  long-standing   relationships  with  the  Company's  target
customers.  In addition,  many of the Company's  competitors  enjoy economies of
scale that can result in a lower cost  structure  for  transmission  and related
costs, which could cause significant  pricing pressures within the long-distance
telecommunications  industry.  If  the  Company's  competitors  were  to  devote
significant additional resources to the provision of international long-distance
services  to  the  Company's  target  customer  base,  the  Company's  business,
financial  condition,  and results of operations  could be materially  adversely
affected.

   In the United  States,  the  Federal  Communications  Commission  ("FCC") and
relevant  state  Public  Service  Commissions  have the  authority  to  regulate
interstate and intrastate  telephone service rates,  respectively,  ownership of
transmission facilities,  and the terms and conditions under which the Company's
services  are  provided.   Legislation  that  substantially   revised  the  U.S.
Communications  Act of 1934  was  signed  into law on  February  8,  1996.  This
legislation  has specific  guidelines  under which the Regional  Bell  Operating
Companies ("RBOCs") can provide  long-distance  services,  which will permit the
RBOCs to  compete  with the  Company in  providing  domestic  and  international
long-distance  services.  Further,  the legislation,  among other things,  opens
local service markets to competition  from any entity  (including  long-distance
carriers, cable television companies and utilities).

   Because  the   legislation   opens  the   Company's   markets  to  additional
competition,  particularly  from the RBOCs, the Company's ability to compete may
be  adversely  affected.   Moreover,  certain  Federal  and  other  governmental
regulations  may be amended or modified,  and any such amendment or modification
could have  material  adverse  effects  on the  Company's  business,  results of
operations, and financial condition.

2. SIGNIFICANT ACCOUNTING PRINCIPLES:

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

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

REVENUE RECOGNITION

   Revenues for telecommunication  services provided to customers are recognized
as services  are  rendered,  net of an  allowance  for revenue  that the Company
estimates will ultimately not be realized.  Revenues for return traffic received
according to the terms of the Company's  operating  agreements  with its foreign
partners  are  recognized  as  revenue as the return  traffic  is  received  and
processed.

                                       28

<PAGE>
   The Company has entered into  operating  agreements  with  telecommunications
carriers in foreign countries under which international long-distance traffic is
both delivered and received.  Under these  agreements,  the foreign carriers are
contractually obligated to adhere to the policy of the FCC, whereby traffic from
the foreign country is routed to international carriers, such as the Company, in
the same  proportion  as traffic  carried into the country.  Mutually  exchanged
traffic  between the Company  and foreign  carriers is settled  through a formal
settlement  policy at agreed  upon rates  per-minute.  The  Company  records the
amount due to the  foreign  partner  as an expense in the period the  traffic is
terminated.  When the return  traffic is  received  in the  future  period,  the
Company generally  realizes a higher gross margin on the return traffic compared
to the lower margin (or  sometimes  negative  margin) on the  outbound  traffic.
Revenue  recognized  from return traffic was  approximately  $2.0 million,  $1.1
million  and $1.4  million,  or 19  percent,  3  percent,  and 2 percent  of net
revenues in 1995, 1996, and 1997,  respectively.  There can be no assurance that
traffic will be delivered  back to the United  States or what impact  changes in
future  settlement  rates,  allocations among carriers or levels of traffic will
have on net payments made and revenues received and recorded by the Company.

COST OF SERVICES

   Cost of services  represents  direct  charges  from  vendors that the Company
incurs to  deliver  service to its  customers.  These  include  costs of leasing
capacity and rate-per-minute charges from carriers that originate, transmit, and
terminate traffic on behalf of the Company.  The Company accrues disputed vendor
charges until such differences are resolved. (see Notes 4 and 12).

CASH AND CASH EQUIVALENTS

   The Company considers all short-term  investments with original maturities of
90 days or less to be cash  equivalents.  Cash equivalents  consist primarily of
money market accounts that are available on demand. The carrying amount reported
in the accompanying balance sheets approximates fair value.

FAIR VALUE OF FINANCIAL INSTRUMENTS

   The carrying amounts for current assets and current  liabilities,  other than
the current  portion of notes  payable to related  parties and  individuals  and
other,  approximate  their fair value due to their short maturity.  The carrying
value of the receivables-based credit facility approximates fair value, since it
bears interest at a variable rate which reprices frequently.  The carrying value
of restricted cash approximates fair value plus accrued interest. The fair value
of notes payable to individuals  and others and notes payable to related parties
cannot be reasonably and  practicably  estimated due to the unique nature of the
related underlying transactions and terms (Note 7). However, given the terms and
conditions  of these  instruments,  if these  financial  instruments  were  with
unrelated  parties,  interest  rates and payment  terms  could be  substantially
different  than the currently  stated rates and terms.  These notes were paid in
full in July 1997.

LONG-LIVED ASSETS

   Long-lived  assets and  identifiable  assets to be held and used are reviewed
for impairment  whenever  events or changes in  circumstances  indicate that the
carrying  amount  should be  addressed.  Impairment is measured by comparing the
carrying  value to the  estimated  undiscounted  future  cash flows  expected to
result from the use of the assets and their eventual  dispositions.  The Company
considers  expected cash flows and estimated future operating  results,  trends,
and other available  information in assessing  whether the carrying value of the
assets is impaired.  The Company believes that no such impairment  existed as of
December 31, 1996 and 1997.

   The  Company's  estimates  of  anticipated  gross  revenues,   the  remaining
estimated  lives of tangible and intangible  assets,  or both,  could be reduced
significantly in the future due to changes in technology,  regulation, available
financing,  or  competitive  pressures  (see Note 1). As a result,  the carrying
amount of long-lived assets could be reduced materially in the future.

OTHER CURRENT ASSETS

   Included in other current  assets is  approximately  $1.1 million for amounts
due from employees related to the exercise of stock options in December 1997. No
cash was advanced to these employees. Additionally, none of these employees were
executive  officers of the  corporation.  All amounts due from employees for the
payments of the exercise  price and related  payroll  taxes.  were  collected in
January 1998.

PROPERTY AND EQUIPMENT

   Property  and  equipment  are  stated at  historical  cost.  Depreciation  is
provided for financial  reporting  purposes  using the straight line method over
the following estimated useful lives:

        Long-distance communications equipment (including
            undersea  cable)................................    7 to 20 years
         Computer and office equipment  ....................     3 to 5 years

   Long-distance communications equipment includes assets financed under capital
lease obligations of approximately  $1,287,000 and $1,456,000 as of December 31,
1996 and 1997,  respectively.  Accumulated  depreciation  on these  assets as of
December  31,  1996,   and  1997,  was   approximately   $587,000  and  $672,000
respectively.

Maintenance and repairs are expensed as incurred.  Replacements  and betterments
are capitalized. The cost and related accumulated depreciation of assets sold or
retired are removed from the balance  sheet,  and any resulting  gain or loss is
reflected in the statement of operations

                                       29

<PAGE>
CONCENTRATIONS OF RISK

   Financial instruments that potentially subject the Company to a concentration
of credit risk are accounts receivable.  Residential accounts receivable consist
of  individually  small  amounts due from  geographically  dispersed  customers.
Carrier accounts receivable  represent amounts due from long-distance  carriers.
The  Company's  allowance  for  doubtful  accounts  is based on  current  market
conditions.   The  Company's   four  largest   carrier   customers   represented
approximately 35 and 44 percent of gross accounts  receivable as of December 31,
1996 and 1997,  respectively.  Revenues from several customers  represented more
than 10  percent  of net  revenues  for the  periods  presented  (see  Note 10).
Including  charges  in dispute  (see Note 4),  purchases  from the five  largest
suppliers represented approximately 67 and 47 percent of cost of services in the
year ended  December 31, 1996 and 1997,  respectively.  Services  purchased from
several  suppliers  represented  more than 10 percent of cost of services in the
periods presented (see Note 10). One of these suppliers, representing 25 percent
and 7 percent of cost of services in the year ended  December 31, 1996 and 1997,
respectively, is based in a foreign country.

INCOME TAXES

   The  Company  accounts  for income  taxes in  accordance  with  Statement  of
Financial  Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109  requires  that  deferred  income  taxes  reflect the  expected tax
consequences on future years of differences  between the tax bases of assets and
liabilities  and  their  bases  for  financial  reporting  purposes.   Valuation
allowances are  established  when necessary to reduce deferred tax assets to the
expected amount to be realized.

EARNINGS (LOSS) PER SHARE

   In February 1997, the Financial Accounting Standards Board released Statement
No. 128,  "Earnings Per Share." SFAS No. 128 requires dual presentation of basic
and diluted  earnings per share on the face of the  statements of operations for
all  periods  presented.  Basic  earnings  per share  excludes  dilution  and is
computed  by  dividing   income   available  to  common   stockholders   by  the
weighted-average  number of common shares  outstanding  for the period.  Diluted
earnings  per  share  reflects  the  potential  dilution  that  could  occur  if
securities or other  contracts to issue common stock were exercised or converted
into common  stock or resulted in the  issuance of common stock that then shared
in the earnings of the entity.  Diluted earnings per share is computed similarly
to fully diluted earnings per share under Accounting Principles Bulletin No. 15.
In  February  1998,  the  Securities  and  Exchange  Commission  released  Staff
Accounting  Bulletin  ("SAB") No. 98, which  revised the previous  "cheap stock"
rules for earnings per share  calculations in initial public offerings under SAB
No. 83. SAB No. 98  essentially  replaces the term "cheap  stock" with  "nominal
issuances" of common stock. Nominal issuances arise when a company issues common
stock,  options, or warrants for nominal  consideration in the periods preceding
the initial  public  offering.  SAB No. 98 is  effective  immediately,  and also
reflects the requirements of SFAS No. 128. The Company has restated its earnings
(loss) per share for all periods  presented to be  consistent  with SFAS No. 128
and SAB No. 98.

           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                        YEAR ENDED DECEMBER 31,
                                    -----------------------------
                                      1995       1996       1997
                                    ---------- --------   --------
   Weighted average common shares
       outstanding - basic..........    5,317     5,403      6,136
   Stock options and warrant               --        --        287
       equivalents..................---------   --------   ---------
   Weighted average shares and
       equivalents - diluted........    5,317     5,403      6,423
                                   .---------   --------   ---------
   Per Share Amounts:
       Basic........................ $  (0.23) $  (0.52)  $   0.26
                                    ========== =========  ========
       Diluted......................$   (0.23) $  (0.52)  $   0.25
                                    ========== =========  ========

   Options to purchase approximately 143,000 and 138,000 shares of common stock,
were excluded from the  computation  of diluted loss per share in 1995 and 1996,
respectively,  because  inclusion of these options  would have an  anti-dilutive
effect on earnings per share.

DEBT DISCOUNT AND DEFERRED DEBT FINANCING COSTS

   As more fully  discussed in Note 5, on July 1, 1997, the Company entered into
a credit facility (the "Loan") with a bank (the  "Lender").  Debt discount costs
represent amounts ascribed to the redeemable  warrants issued in connection with
the  Loan.  The   unamortized   debt  discount  as  of  December  31,  1997  was
approximately   $658,000.   Unamortized   deferred  debt  financing  costs  were
approximately  $294,000 at December 31, 1997 and represent  other costs incurred
in  connection  with the  establishment  of the  Loan.  These  costs  are  being
amortized  over the term of the Loan using the effective  interest  method.  The
aggregate  unamortized  amounts are reflected in "Deferred debt financing costs,
net" in the balance sheet as of December 31, 1997.

ADVERTISING COST

   In accordance  with  Statement of Position  93-7,  "Reporting on  Advertising
Costs," costs for  advertising  are expensed as incurred within the fiscal year.
Such costs are included in " Selling and marketing  expenses" in the  statements
of operations.

                                       30

<PAGE>
ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE

   In June 1997, the Financial  Accounting  Standards Board issued SFAS No. 130,
"Reporting  Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." The Company is required to adopt both
of these standards for the year ending December 31, 1998.

   SFAS No. 130 requires  "comprehensive  income" and the  components  of "other
comprehensive  income", to be reported in the financial  statements and/or notes
thereto.  As the  Company  does not  currently  have any  components  of  "other
comprehensive  income" it is not expected  that this  statement  will affect the
Company's financial statements.

   SFAS  No.  131  requires  entities  to  disclose  financial  and  descriptive
information  about  its  reportable  operating  segments.  It  also  establishes
standards for related disclosures about products and services, geographic areas,
and major  customers.  The Company is in the process of assessing the additional
disclosures,  if any, required by SFAS No. 131. However,  such adoption will not
impact the  Company's  results of  operations  or financial  position,  since it
relates only to disclosures.

3. ACCOUNTS RECEIVABLE:

   Accounts receivable consist of the following (in thousands):

                                          DECEMBER 31,
                                        ---------------
                                        1996       1997
                                        ----      -----
  Residential......................    $ 3,840   $   9,560
  Carrier..........................      2,573      9,773
                                       --------   --------
                                         6,413     19,333
  Allowance for doubtful accounts..     (1,079)    (2,353)
                                       ========   ========
                                       $5,334    $ 16,980
                                       ========   ========

   The  Company has  certain  service  providers  that are also  customers.  The
Company carries and settles  amounts  receivable and payable from and to certain
of these parties on a net basis.

   Approximately  $3,428,000 of residential  receivables as of December 31, 1996
were pledged as security under the  receivables-based  credit facility agreement
discussed in Note 5. No receivables were pledged as of December 31, 1997, as the
related facility was extinguished in July 1997.

4. ACCRUED EXPENSES:

   Accrued expenses consist of the following (in thousands):

                                                   DECEMBER 31,
                                                   ------------
                                                  1996      1997
                                                  ----      -----
       Disputed vendor charges............     $ 2,057   $ 2,124
       Accrued payroll and related taxes..         368      1,194
       Accrued excise taxes and related            182         --
       charges............................
       Accrued interest...................          88         22
       Other..............................         163        388
                                              --------- ----------
                                              $  2,858  $   3,728
                                              ========= ==========

   Disputed  vendor  charges  represent an assertion  from one of the  Company's
foreign  carriers  for  minutes  processed  that are in excess of the  Company's
records.  The Company has provided  approximately  $1,414,000 and $67,000 in the
years  ended  December  31,  1996 and 1997,  respectively,  related to  disputed
minutes for which the Company has not recognized any corresponding  revenue.  If
the Company prevails in its dispute,  these amounts or portions thereof would be
credited to operations in the period of resolution.  Conversely,  if the Company
does not  prevail in its  dispute,  these  amounts  or  portions  thereof  would
presumably be paid in cash.

5. CREDIT FACILITY:

   Prior to July 1, 1997, the Company had an advanced  payment  agreement with a
third party billing company,  which allowed the Company to take advances against
70 percent of all records  submitted  for billing.  Advances were secured by the
receivables  involved.  Approximately  $1,812,000  was  outstanding  under  such
receivables-based  credit  facility as of  December  31,  1996,  with a weighted
average interest rate on outstanding  borrowings of 12.25 percent. In July 1997,
the Company paid the remaining  amounts owed under this agreement using proceeds
from the Loan discussed below.

                                       31

<PAGE>
   On July 1, 1997 the  Company  entered  into a Loan  with a  Lender.  The Loan
provides for maximum  borrowings of up to $10 million through December 31, 1997,
and the lesser of $15 million or 85 percent of eligible accounts receivable,  as
defined,  thereafter  until  maturity in December 1999. The Company may elect to
pay  quarterly  interest  payments  at the prime  rate,  plus 2 percent,  or the
adjusted LIBOR, plus 4 percent.  The Loan required a $150,000  commitment fee to
be paid at closing, and a quarterly commitment fee of one quarter percent of the
unborrowed  portion.  The Loan is secured by substantially  all of the Company's
assets  and the common  stock  owned by the  majority  stockholder  and  another
stockholder. The Loan contains certain financial and non-financial covenants, as
defined,  including,  but not limited to, ratios of monthly net revenues to Loan
balance,  interest  coverage,  and  cash  flow  leverage,   minimum  residential
subscribers,  and limitations on capital expenditures,  additional indebtedness,
acquisition  or  transfer  of assets,  payment of  dividends,  new  ventures  or
mergers,  and  issuance  of  additional  equity  (excluding  shares  issuable in
connection  with the  Offering).  Beginning  on July 1, 1998,  should the Lender
determine and assert based on its reasonable  assessment that a material adverse
change has occurred,  all amounts outstanding would become due and payable.  The
weighted  average  borrowings  and interest cost under the Loan during 1997 were
approximately  $2,015,000  and 10 percent,  respectively.  The  highest  balance
outstanding  during  1997  was  approximately  $7,012,000.  The  Company  had no
outstanding balance under the Loan as of December 31, 1997.

   In  connection  with the Loan,  the  Company  issued the Lender  warrants  to
purchase 539,800 shares of the Company's  common stock,  representing 10 percent
of the outstanding  common stock on the date of issuance.  Warrants with respect
to 269,900 of such shares,  or 5 percent of the outstanding  common stock at the
time the warrants were issued, vested fully on the date of the issuance. Vesting
of the remaining  warrants was contingent on the  occurrence of certain  events,
and,  since the Company  completed  the Offering  prior to December 31, 1997, no
additional  warrants will vest.  The exercise price of the warrants is $8.46 per
share,  and they expire on July 1, 2002.  Upon  completion of the Offering,  the
warrants  ceased  to  be  redeemable  and,   accordingly,   the  fair  value  of
approximately $823,000 ascribed to the warrants are classified as a component of
stockholders'  equity as of December 31, 1997.  Proceeds from the Loan were used
to pay down the  receivables-based  credit facility (discussed above), to retire
the notes  payable to related  parties  and  individuals  and other (Note 7), to
retire   certain   capital   lease   obligations,   to  purchase   long-distance
communications equipment, and for general working capital purposes.

6. STOCKHOLDERS' EQUITY (DEFICIT):

   In  July  1997,  the  Company  exchanged  17,175  shares  of its  outstanding
nonvoting  common stock for  authorized  voting  common stock and  purchased the
remaining  5,351  shares of  outstanding  nonvoting  common  stock from a former
officer and  director of the Company for $45,269.  In August  1997,  the Company
increased  its  authorized  shares of common stock to  20,000,000  and created a
preferred  class of stock with 100,000 shares of $1.00 par value preferred stock
authorized for issuance.

STOCK OPTION PLANS

   1997 Performance Incentive Plan

   In August 1997, the stockholders of the Company approved the 1997 Performance
Incentive Plan (the "Performance  Plan").  The Performance Plan provides for the
award to eligible  employees of the Company and others of stock  options,  stock
appreciation rights,  restricted stock, and other stock-based awards, as well as
cash-based annual and long-term  incentive awards. The Performance Plan reserves
750,000  shares of common stock for issuance,  and the Company may grant options
to  acquire  up to  480,000  shares  of  common  stock  without  triggering  the
antidilution  provisions of the warrants  issued to the Lender (see Note 5). The
options expire 10 years from the date of grant and vest ratably over five years.
The Performance  Plan provides that all outstanding  options become fully vested
in the event of a change in  control,  as  defined.  As of  December  31,  1997,
approximately  352,000  options were  available for grant under the  Performance
Plan.

    Amended and Restated Stock Option Plan

   The Company's Amended and Restated Stock Option Plan, reserves 270,000 shares
of voting  common stock to be issued to officers and key  employees  under terms
and conditions to be set by the Company's  Board of Directors.  Options  granted
under  this  plan  may be  exercised  only  upon  the  occurrence  of any of the
following  events:  (i) a sale  of  more  than  50  percent  of the  issued  and
outstanding  shares  of  stock  in  one  transaction,   (ii)  a  dissolution  or
liquidation of the Company, (iii) a merger or consolidation in which the Company
is not the surviving  corporation,  (iv) a filing by the Company of an effective
registration  statement under the Securities Act of 1933, as amended, or (v) the
seventh  anniversary  of the date of full-time  employment of the optionee.  The
Company  amended its stock  option  plan as of January 20, 1997 to provide  that
options may be exercised on or after the seventh anniversary of the date of full
time employment.  In conjunction with the original  exercise prices and pursuant
to Accounting  Principles Board opinion No. 25,  "Accounting for Stock Issued to
Employees" ("APB No. 25") and its related interpretations,  compensation expense
is recognized for financial reporting purposes when it becomes probable that the
options will be  exercisable.  The amount of  compensation  expense that will be
recognized  is  determined  by the excess of the fair value of the common  stock
over the  exercise  price of the related  option at the  measurement  date.  The
Company recognized  approximately  $131,000 in compensation expense for the year
ended  December  31,  1997  as the  vesting  of  the  options  accelerated  upon
completion of the Offering.


                                       32

<PAGE>
   A summary of the  Company's  aggregate  stock  option  activity  and  related
information under the Amended and Restated Option Plan and the Performance Plan,
is as follows:
<TABLE>
<CAPTION>

                                                                     YEAR ENDED DECEMBER 31,
                                          ----------------------------------------------------------------------------------
                                                    1995                       1996                       1997
                                          --------------------------  ------------------------  -----------------------------
                                                        WEIGHTED-                  WEIGHTED-                   WEIGHTED-
                                                         AVERAGE                    AVERAGE                    AVERAGE
                                                         EXERCISE                  EXERCISE                    EXERCISE
                                            OPTIONS       PRICE        OPTIONS       PRICE       OPTIONS        PRICE
                                          ------------ -------------  -----------  -----------  -----------  ------------
<S>                                           <C>             <C>        <C>           <C>         <C>                 <C>
            Options outstanding at
               beginning of period.......... 103,200         $0.30      143,200       $ 0.38      138,300      $   0.38
            Granted.........................  40,000          0.60           --          --       668,366          8.14
            Exercised ......................   --              --           --           --      (136,500)         1.05
            Forfeited.......................   --              --        (4,900)        0.36     (138,500)         0.38
                                            ============ =============  -----------  -----------  ===========  ========
            Options outstanding at end
               of period...................   143,200        $ 0.38      138,300       $ 0.38      531,666      $  9.96
                                            ============ =============  ===========  ===========  ===========  ========
            Options  exercisable at end
               of period..................        --                       --                      133,266      $  1.85
                                            ============                ===========               ===========  ==========
</TABLE>

     Exercise  prices for options  outstanding  as of December 31, 1997,  are as
follows:

<TABLE>
<CAPTION>
                                                   OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                                ----------------------------------------------------------  --------------------------------------II
              RANGE OF          NUMBER OUTSTANDING      WEIGHTED-AVERAGE   WEIGHTED-AVERAGE NUMBER OF OPTIONS    WEIGHTED-AVERAGE
           EXERCISE PRICES        AS OF DECEMBER           REMAINING           EXERCISE      OUTSTANDING AS OF     EXERCISE
                                     31, 1997           CONTRACTUAL LIFE        PRICE        DECEMBER 31, 1997       PRICE
                                                            IN YEARS
          ------------------    --------------------   -------------------   -------------  --------------------  ------------
<S>                                         <C>              <C>                <C>                     <C>           <C>
            $1.85 - $1.85                   133,266           9.05              $    1.85               133,266      $   1.85
           $10.00 - $10.00                  230,900           9.63                  10.00                    --            --
           $12.00 - $12.00                    7,500           9.63                  12.00                    --            --
           $16.56 - $16.56                  160,000           9.94                  16.56                    --            --
          ==================    ====================  ====================  ============          ====================  ============
           $1.85 - $16.56                   531,666           9.58               $   9.96               133,266       $  1.85
          ==================    ====================   ===================   =============         ====================  ===========
</TABLE>

     The Company has elected to account for stock and stock rights in accordance
with APB No.  25.  SFAS No.  123,  "Accounting  for  Stock-Based  Compensation,"
established  an  alternative  method  of  expense  recognition  for  stock-based
compensation  awards to employees based on fair values.  The Company has elected
not to adopt SFAS No. 123 for expense recognition purposes.

   Pro forma  information  regarding  net income is required by SFAS No. 123 and
has been  determined  as if the Company had  accounted  for its  employee  stock
options  under the fair value method  prescribed by SFAS No. 123. The fair value
of options  granted  during the year ended  December 31, 1995 and the year ended
December 31,  1997,  was  estimated  at the date of grant using a  Black-Scholes
option pricing model with the following weighted-average assumptions:  risk-free
interest   rates  of  5.4  percent   and  6.2   percent;   no  dividend   yield;
weighted-average  expected  lives of the  options of five  years,  and  expected
volatility of 50 percent. There were no options granted in 1996.

   The Black-Scholes  option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective assumptions,  including the expected stock price characteristics that
are significantly different from those of traded options. Because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock rights.

   The weighted-average  fair value of options granted during 1995 and 1997, was
$0.34 per share and $4.32 per share,  respectively.  For  purposes  of pro forma
disclosures,  the  estimated  fair value of options is amortized to expense over
the estimated  service period. If the Company had used the fair value accounting
provisions  of SFAS No. 123, the pro forma net loss for 1995 and 1996 would have
been  $1,208,714  and  $2,832,531,  respectively,  or $0.23  and $0.52 per share
(basic and diluted), respectively. Pro forma net income for 1997 would have been
$1,599,733,  or $0.26 per share  (basic)  and  $0.25  per share  (diluted).  The
provisions  of SFAS No. 123 are not  required  to be  applied to awards  granted
prior  to  January  1,  1995.  The  impact  of  applying  SFAS  No.  123 may not
necessarily be indicative of future results.

                                       33
<PAGE>
   In December 1997, under the Performance  Plan, the Company granted to several
consultants  options to acquire  30,000 shares of the Company's  common stock in
lieu of payment of certain  consulting  services to be  performed in the future.
Pursuant to SFAS No. 123, the Company will  recognize  compensation  expense for
the fair value of these options granted to consultants,  as calculated using the
Black-Scholes  option  pricing  model,  using the weighted  average  assumptions
described above.  The fair value of these options is approximately  $254,000 and
will be recognized ratably over five years.

WARRANTS AND REGISTRATION RIGHTS

   The Company agreed to issue to  representatives  of the  underwriters  of the
Offering,  warrants  to  purchase  up to  150,000  shares of common  stock at an
exercise price of $13.20 per share. The warrants are exercisable for a period of
five years  beginning  October  1998.  The holders of the warrants  will have no
voting or other stockholder  rights unless and until the warrants are exercised.
The fair value of these warrants was approximately  $870,000,  and is classified
in stockholders' equity.

   See  Note 5 for a  discussion  of  the  warrants  issued  to  the  Lender  in
connection with the Loan.

7. NOTES PAYABLE TO RELATED PARTIES AND NOTES PAYABLE TO INDIVIDUALS AND OTHER:

   NOTES PAYABLE TO RELATED PARTIES

       Notes payable to related parties consist of the following (in thousands):

                                                          DECEMBER 31,
                                                          ------------
                                                         1996      1997
                                                         ----      ----
  Notes payable to parties related to the primary
  stockholder and president of the Company, bearing
  interest at rates ranging from 15 to 25 percent....  $   153    $    --
  Less Current Portion...............................      (53)        --
                                                       ========= =========
  Long-term Portion..................................  $   100    $    --
                                                       ========= =========

   NOTES PAYABLE TO INDIVIDUALS AND OTHER

       Notes  payable to  individuals  and other  consist of the  following  (in
thousands):
                                                             DECEMBER 31,
                                                             ------------
                                                            1996      1997
                                                            ----      ----
   Notes payable to various parties, bearing interest
     at rates ranging from 15 to 25 percent...........    $    650  $    --

   Note payable to individual, non-interest bearing,
     convertible into 24,000 shares of voting common
     stock upon maturity in 1999........................        --       44
                                                          --------- -------
                                                               650       44
   Less Current Portion...............................        (650)      --
                                                          ========= =======
   Long-term Portion..................................    $     --   $   44
                                                          ========= =======

8. COMMITMENTS AND CONTINGENCIES:

LEASES

The Company  leases office space and  equipment  under  noncancelable  operating
leases. Rent expense was approximately  $94,000,  $97,000,  and $313,000 for the
years ended December 31, 1995,  1996, and 1997,  respectively.  The terms of the
office  lease  require the Company to pay a  proportionate  share of real estate
taxes and  operating  expenses.  As discussed in Note 2, the Company also leases
equipment under capital lease obligations.  The future minimum commitments under
lease obligations are as follows (in thousands):

                                                         CAPITAL    OPERATING
                  YEAR ENDING DECEMBER 31,                 LEASES     LEASES
                  ------------------------                 ------     ------

           1998......................................   $      398    $   615
           1999......................................          393        712
           2000......................................           53        733
           2001......................................           --        657
           2002......................................           --        537
                                                         ---------- ----------
                                                         $     844    $  3,254
           Less - Amounts representing interest......          (96)
           Less - Current portion....................         (331)
                                                         ==========
           Long-term Portion.........................    $     417
                                                        ==========

                                       34

<PAGE>
LEASE WITH RELATED PARTY

   The Company has entered into an agreement  with an affiliate of a stockholder
to lease capacity in certain  undersea fiber optic cable. The agreement grants a
perpetual right to use the cable and requires ten semiannual payments of $38,330
beginning on June 30, 1996. The Company has recorded $93,500 in accounts payable
as of December 31, 1997, related to this agreement. Unpaid amounts bear interest
at the 180-day LIBOR rate, plus one quarter percent.

   The Company is required to pay a proportional  share of the cost of operating
and maintaining the cable. The Company can cancel this agreement without further
obligation, except for amounts related to past usage, at any time.

RESTRICTED CASH

The Company was required to provide a bank  guarantee of $180,000 in  connection
with one of its foreign operating agreements. This guarantee is in the form of a
certificate  of  deposit  and is shown as  restricted  cash in the  accompanying
balance sheets.

EMPLOYEE BENEFIT PLANS

   Subsequent  to year end,  the  Company  adopted the Startec  401(K)  Plan,  a
defined  contribution  plan (the  "Plan").  Employees  are eligible for the Plan
after  completing  at least one year of service and  attaining  age 20. The Plan
allows for employee contributions up to 15% of their compensation.

LITIGATION

   Certain claims and suits have been filed or are pending  against the Company.
In  management's  opinion,  resolution of these matters will not have a material
impact on the Company's financial position or results of operations and adequate
provision for any potential losses has been made in the  accompanying  financial
statements.

9. RELATED-PARTY TRANSACTIONS:

   The  Company has an  agreement  with an  affiliate  of a  stockholder  of the
Company that calls for the purchase and sale of long distance services. Revenues
generated  from this  affiliate  amounted to  approximately  $1.0 million,  $1.5
million, and $1.9 million, or 10, 5, and 2 percent of total net revenues for the
years ended December 31, 1995, 1996, and 1997, respectively.  The Company was in
a net account receivable  position with this affiliate of approximately  $14,000
and $377,000 as of December 31, 1996 and 1997,  respectively.  Services provided
by this affiliate and recognized in cost of services  amounted to  approximately
$134,000,  $663,000 and $680,000 for the years ended December 31, 1995, 1996 and
1997, respectively.

   The Company provided  long-distance services to an affiliated entity owned by
the  primary  stockholder  and  president  of the  Company.  In the  opinion  of
management,  these  services were  provided on standard  commercial  terms.  The
affiliate  provided  long-distance  services  to  customers  in certain  foreign
countries.  Payments  received by the Company  from this  affiliate  amounted to
approximately  $396,000 and $262,000 for the years ended  December 31, 1995, and
1996, respectively.  No services were provided in 1997. The affiliate was unable
to collect approximately  $150,000 and $95,000 from its residential customers in
the years ended December 31, 1995 and 1996,  respectively.  Accounts  receivable
from this affiliated entity were approximately  $64,000 as of December 31, 1996.
There were no amounts outstanding from this affiliate as of December 31, 1997.

   The Company had notes payable to parties  related to the primary  stockholder
and  president of the Company  which were paid in full in July 1997 (see Note 7)
and a lease with an affiliate of a stockholder of the Company (see Note 8).

<PAGE>


10. SEGMENT DATA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS:

SEGMENT DATA

   The  Company   classifies   its   operations   into  one  industry   segment,
telecommunications  services.  Substantially  all of the Company's  revenues for
each period  presented  were  derived from calls  terminated  outside the United
States.

   Net revenues terminated by geographic area were as follows (in thousands):
<TABLE>
<CAPTION>

                                                                    DECEMBER 31,
                                                         ------------------------------------
                                                            1995        1996         1997
                                                            ----        ----         ----
 <S>                                                            <C>       <C>         <C>
  Asia/Pacific Rim.....................................  $    6,970   $ 13,824        $42,039
  Middle East/North Africa.............................         694       8,276       21,236
  Sub-Saharan Africa...................................          35       1,136        6,394
  Eastern Europe.......................................         317       2,650        7,964
  Western Europe.......................................       1,647       1,783        1,913
  North America........................................         494       3,718        3,398
  Other................................................         351         828        2,913
                                                          ===========  =========== ==========
                                                             10,508      32,215       85,857
                                                         =========== ===========  ===========
</TABLE>

                                       35
<PAGE>
SIGNIFICANT CUSTOMERS

    A  significant  portion of the  Company's  net  revenues  is derived  from a
limited number of customers.  During 1996,  the Company's  five largest  carrier
customers  accounted for  approximately  40 percent of the  Company's  total net
revenues,  with one  customer  accounting  for 10  percent  or more of total net
revenues.  During 1997, the Company's five largest carrier  customers  accounted
for approximately 47 percent of net revenues,  with two customers accounting for
10  percent  or more of the  Company's  total  net  revenues.  No other  carrier
customer  accounted  for 10 percent or more of total net  revenues in 1997.  The
Company's  agreements and arrangements with its carrier customers  generally may
be terminated on short notice without penalty.  The following customers provided
10 percent or more of the Company's total net revenues (in thousands):

                                                     DECEMBER 31,
                                      ------------------------------------------
                                              1995           1996         1997
                                              ----           ----         ----
  Videsh Sanchar Nigam Limited
    ("VSNL")..........................       $1,959            *            *
  WorldCom, Inc.......................          *           $7,383      $19,886
  Frontier............................          *              *         12,420

* Revenue provided was less than 10 percent of total revenues for the year.

SIGNIFICANT SUPPLIERS

   A significant  portion of the Company's  cost of services is purchased from a
limited number of suppliers. The following suppliers provided 10 percent or more
of the Company's total cost of services (in thousands):

                                                          DECEMBER 31,
                                          --------------------------------------
                                                 1995           1996        1997
                                                 ----           ----        ----
  VSNL........................................  $7,155         $7,525        *
  Cherry Communications......................      *            3,897        *
  WorldCom, Inc..............................      *            3,972     $9,918
  Pacific Gateway Exchange..................       *              *        8,893

* Cost of services  provided  was less than 10 percent of total cost of services
for the year.

The cost of services  attributable  to VSNL include charges that are in dispute,
as discussed in Note 4. VSNL is a  government-owned,  foreign carrier that has a
monopoly on telephone service in that country.

11. INCOME TAXES:

   The Company has net operating loss carryforwards  ("NOLs") for Federal income
tax purposes of approximately $2,564,000 and $1,878,000, as of December 31, 1996
and 1997,  respectively,  which may be applied against future taxable income and
expire in years 2010 and 2011.  The Company  utilized a portion of these NOLs to
partially  offset its taxable  income for the year ended  December 31, 1997. The
use of the NOLs is subject to statutory  and  regulatory  limitations  regarding
changes in  ownership.  SFAS No. 109  requires  that the tax benefit of NOLs for
financial  reporting  purposes  be  recorded  as an  asset  to the  extent  that
management  assesses the realization of such deferred tax assets is "more likely
than not." A valuation  reserve is established  for any deferred tax assets that
are not expected to be realized.

   As a result of historical  operating losses and the fact that the Company has
a limited  operating  history,  a valuation  allowance equal to the deferred tax
asset was recorded for all periods presented.


                                       36

<PAGE>
    The tax effect of  significant  temporary  differences,  which  comprise the
deferred tax assets and liabilities, are as follows (in thousands)

                                                    DECEMBER 31,
                                                    ------------
                                                   1996       1997
                                                   ------   ------
 Deferred tax assets:
   Net operating loss carryforwards..........     $1,014    $  725
   Allowance for doubtful accounts...........        336       909
   Contested liabilities.....................        814     1,024
   Cash to accrual adjustments...............        778       460
   Other.....................................         17       119
                                               ---------- ---------
     Total deferred tax assets...............      2,959     3,237
 Deferred tax liabilities:
   Depreciation..............................         66       204
   Other.....................................         --        42
                                               ---------- ---------
     Total deferred tax liabilities..........         66       246
                                               ---------- ---------
 Net deferred tax assets.....................      2,893     2,991
 Valuation allowance.........................     (2,893)   (2,991)
                                               ---------- ---------
                                                 $    --       $--
                                                ========== =========

   Pursuant  to Section  448 of the  Internal  Revenue  Code,  the  Company  was
required to change from the cash to the accrual method of accounting. The effect
of this change will be amortized over four years for tax purposes.

   The Company  recorded no benefit or provision  for income taxes for the years
ended  December 31, 1995 and 1996. A provision for Federal  alternative  minimum
tax was recorded for the year ended  December 31, 1997. The components of income
tax expense for the year ended December 31, 1997 are as follows (in thousands):

                                                                 DECEMBER 31,
                                                                    1997
                                                                    ----

           Current Provision
              Federal..........................................    $ 171
              Federal alternative minimum tax..................       29
              State............................................       23

           Deferred benefit
             Federal .........................................       (86)
             State.............................................      (12)
             Benefit of net operating loss carryforwards ......      (96)
               ......................................

                                                                    ----
                                                                    $ 29
                                                                    =====


   The  provision  for income taxes  results in an effective  rate which differs
from the Federal statutory rate as follows:

                                                        DECEMBER 31,
                                                            1997
                                                            ----

         Statutory Federal income tax rate................    35.0%
         Impact of graduated rate.........................    (1.0)
         State income taxes, net of Federal tax benefit...     4.6
         Federal alternative minimum tax..................     1.8
         Benefit of net operating loss carryforwards......   (38.6)
                                                             ======
         Effective rate...................................     1.8%
                                                             ======

                                       37
<PAGE>
12. QUARTERLY DATA - UNAUDITED:

    The following  quarterly financial data has been prepared from the financial
records of the Company without audit, and reflects all adjustments which, in the
opinion of management, were of a normal recurring nature (except as discussed in
notes (B) and (C) below) and necessary for a fair presentation of the results of
operations  for the interim  periods  presented.  The operating  results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>

                                                            QUARTERS ENDED
                               --------------------------------------------------------------------------
                                                1996                                 1997
                               -------------------------------------- -----------------------------------
                               MAR. 31,  JUNE 30,  SEPT. 30, DEC. 31, MAR. 31, JUNE 30,  SEPT. 30  DEC. 31
 <S>                            <C>        <C>      <C>       <C>      <C>      <C>      <C>      <C>
 Net revenues.................. 4,722       8,485    7,652    11,356   12,372   16,464   25,757   31,264
 Gross margin (B) (C)..........   255         563      889       627    1,607    1,979    3,089    3,399
 Income (loss) from operations.  (444)       (409)    (740)     (916)     256      349      738      754
 Net income (loss) (B).........  (497)       (465)    (815)   (1,053)     137      214      413      855
                               ======== ========= ======== ========= ======== ======== ======== ========
 Basic earnings (loss) per
   share (A)................... (0.09)      (0.09)   (0.15)    (0.19)     0.03     0.04     0.08     0.10
                                ======== ========= ======== ========= ======== ======== ======== ========
 Weighted average common
   shares outstanding - basic
   (A)....................... .  5,403     5,403    5,403     5,403    5,403    5,403    5,403    8,324
                               ======== ========= ======== ========= ======== ======== ======== ========

 Diluted earnings (loss) per
   share (A)...................  (0.09)    (0.09)   (0.15)    (0.19)     0.03     0.04     0.07     0.10
                                ======== ========= ======== ========= ======== ======== ======== ========
 Weighted average common
   shares and equivalent -
   diluted (A)...........        5,403     5,403    5,403     5,403    5,474    5,646    5,760    8,709
                               ======== ========= ======== ========= ======== ======== ======== ========
</TABLE>

   (A)  The earnings  (loss) per share  amounts have been restated in accordance
        with SAB No. 98 and SFAS No. 128. Quarterly per share data may not total
        to annual per share data due to  changes in shares  outstanding  for the
        periods.  The increase in weighted  shares in the fourth quarter of 1997
        is due to the Company's initial public offering in October 1997.

   (B)  Vendor  disputes  and other  disputed  charges  resolved  in the  fourth
        quarter of 1997  resulted in net credits as estimated by  management  of
        approximately  $300,000 recognized as lower cost of services and general
        and administrative expenses.

   (C)  During the first quarter of 1997, the Company's gross margin improved by
        approximately  $1.0  million  over  the  fourth  quarter  of  1996.  The
        improvement  was due to (i)  approximately  $500,000 in costs accrued in
        the fourth quarter 1996 for disputed  vendor  obligations as compared to
        approximately  $8,000 in costs accrued during the first quarter of 1997;
        (ii) approximately $400,000 of cost reductions in 1997 resulting from an
        increase in the  utilization of  alternative  termination  options;  and
        (iii) to a lesser  extent,  an increase in the percentage of residential
        traffic originated on net.

                                       38


<PAGE>
   ITEM 9.     CHANGES IN AND  DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND
               FINANCIAL DISCLOSURE.
     None.

                                    PART III

   ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS

     The information concerning directors required for this item is incorporated
by  reference  to the  information  contained  under the  captions  "Election of
Directors", "Meetings and Committees of the Board" and "Section 16(a) Beneficial
Ownership Reporting  Compliance" in the Company's Proxy Statement for the Annual
Meeting of Stockholders.

   ITEM 11.   EXECUTIVE COMPENSATION

     The information  required for this item is incorporated by reference to the
information contained under the caption "Compensation of Directors and Executive
Officers"  in  the  Company's   Proxy   Statement  for  the  Annual  Meeting  of
Stockholders.

   ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information  required for this item is incorporated by reference to the
information  contained under the caption  "Ownership of the Capital Stock of the
Company"  in  the  Company's   Proxy   Statement  for  the  Annual   Meeting  of
Stockholders.

   ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information  required for this item is incorporated by reference to the
information  contained  under the  caption  "Certain  Relationships  and Related
Transactions"  in the  Company's  Proxy  Statement  for the  Annual  Meeting  of
Stockholders.

                                     PART IV

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

     The  following  documents  are filed as part of this Annual  Report on Form
10-K:

     (a)  1.   FINANCIAL STATEMENTS. The financial statements of the Company and
               the related Report of Independent Public Accountants are filed as
               Item 8 hereof.

     (a)  2.   FINANCIAL  STATEMENT  SCHEDULE.  The Financial Statement Schedule
               described below is filed as part of this report.

                  Description:
                  ------------
                  Report of Independent Public Accountants
                  Schedule II - Valuation and Qualifying Accounts

     (a)  3.      EXHIBITS

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                                    Sequential
   Exhibit                                                                                             Page
   Number                                         Description                                         Number
------------   ---------------------------------------------------------------------------------   -----------
<S>            <C>                                                                                 <C>
      3.1*     Amended and Restated Articles of Incorporation.
      3.2*     Amended and Restated Bylaws.
      4.1*     Specimen of Common Stock Certificate.

      4.2*     Warrant Agreement dated as of July 1, 1997 by and between Startec, Inc. and
               Signet Bank.
      4.3*     Form of Underwriters' Warrant Agreement (including Form of Warrant).
      4.4*     Voting Agreement dated as of July 31, 1997 by and between Ram Mukunda and

               Vijay and Usha Srinivas.

     10.1*     Secured Revolving Line of Credit Facility Agreement dated as of July 1, 1997 by
               and between Startec, Inc. and Signet Bank.
     10.2*     Lease by and between Vaswani Place Limited Partnership and Startec, Inc. dated
               as of September 1, 1994, as amended.

     10.3*     Agreement by and between World Communications, Inc. and Startec, Inc. dated as
               of April 25, 1990.

     10.4*     Co-Location and Facilities Management Services Agreement by and between
               Extranet Telecommunications, Inc. and Startec, Inc. dated as of August 28, 1997.

     10.5*     Employment Agreement dated as of July 1, 1997 by and between Startec, Inc. and
               Ram Makunda.
     10.6*     Employment Agreement dated as of July 1, 1997 by and between Startec, Inc. and
               Prabhav V. Maniyar.
     10.7*     Amended and Restated Stock Option Plan.
     10.8*     1997 Performance Incentive Plan.

     10.9*     Subscription Agreement by and among Blue Carol Enterprises, Limited, Startec,
               Inc. and Ram Mukunda dated as of February 8, 1995.

    10.10*     Agreement for Management Participation by and among Blue Carol Enterprises,
               Limited, Startec, Inc. and Ram Makunda dated as of February 8, 1995, as amended
               as of June 16, 1997.

    10.11*     Service Agreement by and between Companhia Santomensed De
               Telecommunicacoes and Startec, Inc. as amended on February 8, 1995.

    10.12*+    Lease Agreement between Companhia Protuguesa Radio Marconi, S.A. and
               Startec, Inc. dated as of June 15, 1996.

    10.13*+    Indefeasible Right of Use Agreement between Companhia Portuguesa Radio
               Marconi, S.A. and Startec, Inc. dated as of January 1, 1996.

    10.14*+    International Telecommunication Services Agreement between Videsh Sanchar
               Nigam Ltd. and Startec, Inc. dated as of November 12, 1992.

    10.15*+    Digital Service Agreement with Communications Transmission Group, Inc. dated
               as of October 25, 1994.

    10.16*+    Lease  Agreement  by and  between  GPT  Finance  Corporation  and
               Startec, Inc. dated as of January 10, 1990.

    10.17*+    Carrier Services Agreement by and between Frontier Communications Services,
               Inc. and Startec, Inc. dated as of February 26, 1997.

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                                                                                   Sequential

   Exhibit                                                                                            Page
    Number                                        Description                                        Number

-------------   -------------------------------------------------------------------------------   -----------
<S>             <C>                                                                               <C>
    10.18*+     Carrier Services Agreement by and between MFS International, Inc. and Startec,

                Inc. dated as of July 3, 1996.

    10.19*+     International Carrier Voice Service Agreement by and between MFS
                International, Inc. and Startec, Inc. dated as of June 6, 1996.

    10.20*+     Carrier Services Agreement by and between Cherry Communications, Inc. and
                Startec, Inc. dated as of June 7, 1995.

       11*#     Statement re Computation of per share earnings.
       12**     Not Applicable.
       13***    Annual Report to Security Holders.

       16       Not Applicable.
       18       Not Applicable.
       21       Not Applicable.
       22       Not Applicable.

     23.1* *    Consent of Arthur Andersen LLP.
       24       Not Applicable.

     27.1* *    Financial Data Schedule.

</TABLE>

----------
Incorporated  by reference from the Company's Registration Statement on Form S-1
(SEC File No. 333-32753).

*#- Included in footnotes to financial statements.

**Filed herewith.

*** To be filed by amendment.

     Portions  of  the  Exhibit  have  been  omitted  pursuant  to  a  grant  of
Confidential  Treatment by the Securities and Exchange Commission under Rule 406
of the Securities Act of 1933, as amended, and the Freedom of Information Act.


(b)   REPORTS ON FORM 8-K
      -------------------

     On November 17, 1997,  the Company filed a Form 8-K with the Securities and
Exchange Commission.

                                       39

<PAGE>


                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the  undersigned,  thereunto  duly  authorized,  in  Montgomery
County, State of Maryland, on the 31st day of March, 1998.

                    STARTEC GLOBAL COMMUNICATIONS CORPORATION
                    -----------------------------------------
<TABLE>
<CAPTION>

                  Signatures                                  Title                                 Date
                  ----------                                  -----                                 ----
<S>                                      <C>                                                      <C>
           /s/ Ram Mukunda               President, Chief Executive Officer, Treasurer and        March 31, 1998
 --------------------------------------     Director (Principal Executive Officer)
             Ram Mukunda



          /s/ Prabhav V. Maniyar          Senior Vice President, Chief Financial Officer,         March 31, 1998
 -------------------------------------    Secretary and Director(Principal Financial and
            Prabhav V. Maniyar                     Accounting Officer)


          /s/ Vijay Srinivas              Director                                                March 31, 1998
--------------------------------------
              Vijay Srinivas

         /s/ Nazir G. Dossani             Director                                                March 31, 1998
--------------------------------------
             Nazir G. Dossani

         /s/ Richard K. Prins             Director                                                March 31, 1998
--------------------------------------
             Richard K. Prins
</TABLE>

                                       40
<PAGE>
                                  EXHIBIT INDEX

   EXHIBIT NO.               DESCRIPTION
   -----------               -----------

       23.1             Consent of Arthur Andersen LLP
       27.1             Financial Data Schedule







                                       41

<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

   To Startec Global Communications Corporation:

   We have audited,  in accordance with generally  accepted auditing  standards,
the  financial  statements  of  Startec  Global  Communications  Corporation  (a
Maryland  corporation)  included  in this Form 10-K and have  issued  our report
thereon dated March 4, 1998.  Our audits were made for the purpose of forming an
opinion on the basic financial  statements taken as a whole. The schedule listed
in Item 14(a) is the responsibility of the Company's management and is presented
for purposes of complying with the Securities  and Exchange  Commission's  rules
and is not  part of the  basic  financial  statements.  This  schedule  has been
subjected  to the  auditing  procedures  applied  in  the  audits  of the  basic
financial  statements  and,  in our  opinion,  fairly  states,  in all  material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.

                                                ARTHUR ANDERSEN LLP

   Washington, D.C.,
   March 4, 1998


                                       42

<PAGE>



                    STARTEC GLOBAL COMMUNICATIONS CORPORATION

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                                          (IN THOUSANDS)
               COLUMN A                 COLUMN B    COLUMN C       COLUMN D       COLUMN E     COLUMN F
               --------                 --------    --------       --------       --------     --------
                                                            ADDITIONS
                                                   -----------------------------
                                         BALANCE       CHARGED        CHARGED TO
                                          AT         TO COSTS        OTHER                       BALANCE
                                       BEGINNING       AND          ACCOUNTS-     DEDUCTIONS-    AT END OF
            DESCRIPTION                OF PERIOD    EXPENSES       DESCRIBER(A)   DESCRIBE(B)     PERIOD
            -----------                ---------    --------       ------------   -----------     ------
<S>                                     <C>        <C>            <C>            <C>             <C>
Reflected as reductions
  to the related assets:
  Provisions for uncollectible
   accounts (deductions from trade
   accounts receivable)
  Year ended December 31, 1995.........  $  752     $   150        $    174       $ (619)         $ 457
  Year ended December 31, 1996.........     457         783             464         (625)         1,079
  Year ended December 31, 1997.........   1,079          57           1,864         (647)         2,353

(a) Represents reduction of revenue for accrued credits on residential business.
(b) Represents amounts written off as uncollectible.
</TABLE>

                                       43