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, 1998

                                       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
                             10411 MOTOR CITY DRIVE
                               BETHESDA, MD 20817
                                 (301) 365-8959

            DELAWARE                                             52-2099559 
(State or Other Jurisdiction of                               (I.R.S. Employer
 Incorporation or Organization)                              Identification No.)

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

                                      NONE

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

                              TITLE OF EACH CLASS:
                             COMMON STOCK, PAR VALUE
                                 $0.01 PER SHARE

     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 5,364,324
shares of Common Stock as of March 19, 1999.  The fair market value of the stock
held by  non-affiliates  is $46,937,835 based on the sale price of the shares on
March 19, 1999.

     As of March 19, 1999,  9,389,815  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, 1998

                                TABLE OF CONTENTS


<TABLE>
<S>                         <C>                                                                                       <C>
PART I.


           Item 1.          Business................................................................................... 3
           Item 2.          Properties.................................................................................29
           Item 3.          Legal proceedings..........................................................................29
           Item 4.          Submission of matters to a vote of security holders........................................29

PART II.

           Item 5.          Market for the registrant's common stock and related
                                 stockholder matters...................................................................29
           Item 6.          Selected financial data....................................................................31
           Item 7.          Management's discussion and analysis of financial
                                 condition and results of operations...................................................32
           Item 7A.         Quantitative and qualitative disclosure about market
                                 risk..................................................................................40
           Item 8.          Financial statements and supplementary data................................................41
           Item 9.          Changes in and disagreements with accountants on
                                 accounting and financial disclosure...................................................63

PART III.

           Item 10.         Directors and executive officers...........................................................63
           Item 11.         Executive compensation.....................................................................63
           Item 12.         Security ownership of certain beneficial
                                 owners and management.................................................................63
           Item 13.         Certain relationships and related transactions.............................................63

PART IV.
           Item 14.         Exhibits, financial statement schedules, and reports
                                 on Form 8-K...........................................................................63

</TABLE>


                                      
<PAGE>

                                     PART I

NOTE REGARDING 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")  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,  significant
industry competition 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 is a rapidly growing,  facilities-based international long distance
telecommunications  service provider. The Company markets its services to select
ethnic residential communities located in major metropolitan areas in the United
States and  Europe and to leading  international  long  distance  carriers.  The
Company provides its services through a flexible,  high-quality network of owned
and leased  transmission  facilities,  operating and termination  agreements and
resale  arrangements.  The Company  currently  owns and  operates  international
gateway switching  facilities in New York, New York and Los Angeles,  California
and is  installing  additional  international  gateway  switching  facilities in
Miami,  Florida,  as well as at a second site in New York, New York. The Company
expects to  install  multiple  switches  worldwide  through  2000.  The  Company
operates  points-of-presence  ("POPs") in the United States, Europe and Asia and
plans to install  additional  POPs in the U.S.,  Canada,  Europe and Asia during
1999 and 2000.  Additionally,  the Company  owns  capacity on 13 undersea  fiber
optic cables and plans to acquire  additional  capacity in cable systems linking
North America with Europe,  the Pacific Rim, Asia and Latin America,  as well as
linking the East Coast and West Coast of the United  States.  The  Company  also
plans to invest in or acquire  capacity on two satellite  earth stations in 1999
located  over the Pacific and  Atlantic  Oceans.  As the  Company  executes  its
expansion  strategy and encounters new marketing  opportunities,  management may
elect  to  relocate  or  re-deploy  certain  switches,  POPs and  other  network
equipment to alternate locations.

     Startec  was  founded in 1989 to  capitalize  on  opportunities  to provide
international  long distance services to select ethnic communities in major U.S.
metropolitan  markets that generate  substantial  long distance traffic to their
countries of origin.  Until 1995, the Company concentrated its marketing efforts
in the New  York-Washington,  D.C.  corridor  and  focused  on the  delivery  of
international  calling  services  to  India.  At the end of  1995,  the  Company
expanded its marketing  efforts to include the West Coast of the United  States,
and began targeting other ethnic groups in the United States, such as the Middle
Eastern,  Filipino and Russian communities.  The Company once again expanded its
marketing  efforts  geographically  at the end of 1998 by  marketing  to  ethnic
segments  in the United  Kingdom  and  diversifying  its customer  base across a
broader spectrum of ethnic groups,  including the Caribbean,  Latin American and
Asian communities.

     International   traffic  generated  by  the  Company  currently  terminates
primarily in Asia, the Pacific Rim, the Middle East, Africa, Eastern and Western
Europe and North America. The number of the Company's  residential customers has
grown from 10,675 as of December 31, 1995 to 122,057 as of December 31, 1998.

     The Company uses sophisticated  database marketing techniques and a variety
of media to reach its targeted  residential  customers,  including focused print
advertising  in ethnic  newspapers,  advertising  on ethnic radio and television
stations,  direct mail, sponsorship of ethnic events and customer referrals. The
Company's  strategy is to provide  overall  value to its  customers  and combine
competitive  pricing with high levels of service,  rather than to compete on the
basis of price alone. The Company's customer service center,  which services the
Company's  residential  customer  base,  is  staffed  by  trained,  multilingual
customer  service  representatives,  and  operates 24 hours a day,  seven days a
week.  The  Company  believes  that  its  focused  marketing  programs  and  its
dedication  to  customer  service 




                                       3
<PAGE>


enhance  its ability to attract and retain  customers  in a low-cost,  efficient
manner.

     Residential  customers  access the  Company's  network by dialing a carrier
identification  code ("CIC") prior to dialing the number they are calling.  This
service,  known as "dial-around" or "casual  calling,"  enables customers to use
the Company's  services without changing their existing long distance  carriers.
For the year  ended  December  31,  1998  residential  customers  accounted  for
approximately  33% of  the  Company's  net  revenues.  As  part  of its  overall
strategy,  the Company  seeks to increase  the  proportion  of its net  revenues
derived from residential customers.

     In order to achieve  economies  of scale in its network  operations  and to
balance its residential  international  traffic, in late 1995, the Company began
marketing  its  excess  network  capacity  to  international   carriers  seeking
competitive rates and high-quality  transmission capacity.  Since initiating its
international wholesale services, the Company has expanded its number of carrier
customers  to 53 at December  31,  1998.  For the year ended  December 31, 1998,
carrier  customers  accounted  for  approximately  66.7%  of the  Company's  net
revenues.

     The Company's  mission is to become the leading  provider of voice and data
services to select ethnic communities located in major metropolitan areas in the
U.S.,  Canada and Europe with significant  international  long distance usage to
the  emerging  economies  To achieve  this goal,  the  Company is  strategically
building network facilities to allow it to manage the origination,  transmission
and termination pieces of a telephone call.

     In 1998,  the  Company's  board of directors  and  stockholders  approved a
reorganization  pursuant to which the  Company's  corporate  structure  would be
realigned   to   that   of  a   publicly   traded   Delaware   holding   company
("Reorganization"). Pursuant to the reorganization plan, subsequent to year end,
all of the Company's assets were transferred into a Delaware  subsidiary company
("New  Parent"),  with  a  subsequent  transfer  of  those  assets  to  multiple
subsidiaries  of the New  Parent.  The Company was then merged with and into the
New Parent with the New Parent then assuming the Company's  name. The merger did
not have an impact on the consolidated financial statements of the Company.

THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY

     The international  telecommunications industry consists of transmissions of
voice and data that  originate  in one country  and  terminate  in another.  The
industry is  undergoing a period of  fundamental  change,  which has resulted in
significant  growth in the usage of international  telecommunications  services.
From the  standpoint of U.S.-based  long distance  carriers,  the  international
market can be divided into two major segments: the U.S.-originated market, which
consists of all  international  calls that 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 industry  sources and the  Company's
market research, the international  telecommunications services market generated
approximately $67 billion in revenues and 81 billion minutes of use during 1997.
The international  telecommunications  market is currently  recognized as one of
the   fastest   growing   and   most   profitable   segments   of   the   global
telecommunications industry. According to industry estimates, international long
distance minutes are projected to grow at approximately 17% per year through the
year  2001.  Based on  publicly-available  information,  from 1990 to 1996,  the
U.S.-originated  international  telecommunications  market  grew  at a  compound
annual growth rate of approximately 11% (from $7.6 billion to $14.1 billion) and
is expected to grow at approximately 14% per year through 2001.

    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
         initiatives  and  technological  advancements,  is  expected to lead to
         increased demand for international telecommunications services in those
         markets.

o        Liberalization   of   telecommunications    markets.   The   continuing
         liberalization  and  privatization  of  telecommunications  markets has
         provided, and continues to provide,  opportunities for new carriers who
         desire to penetrate those markets, thereby increasing competition.

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




                                       4
<PAGE>


         long distance carriers to improve service quality while reducing costs.

o        Popularity  and  acceptance  of  technology.   The   proliferation   of
         communications  devices,  including cellular telephones,  and facsimile
         machines,  as well as the  increased  level of Internet  usage led to a
         general  increase  in  the  use  of  telecommunications   services  and
         stimulated demand for faster transmission of data.

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.

     Liberalization  has  encouraged  competition,  which in turn  has  prompted
carriers to offer a wider selection of products and services at lower prices. In
recent years,  prices for  international  long distance  services have decreased
substantially and are expected to continue to decrease in many of the markets in
which the Company  currently  competes.  Several long  distance  carriers in the
United States have introduced  pricing  strategies  that provide for fixed,  low
rates for both  domestic  and  international  calls  originating  in the  United
States.  The Company  believes that revenue losses  resulting from  competition-
induced price decreases have been more than offset by cost decreases, as well as
an increase in telecommunications  usage. For example, based on FCC data for the
period 1990 through 1996, per minute settlement  payments by U.S.-based carriers
to foreign Postal,  Telephone and Telegraph  Companies  ("PTT") fell 38.6%, from
$0.70 per minute to $0.43 per minute. Over this same period, however, per minute
international  billed  revenues fell only 30.2%,  from $1.06 in 1990 to $0.74 in
1996.  The  Company  believes  that as  settlement  rates and  costs for  leased
capacity  continue to decline,  international  long  distance  will  continue to
provide high revenues and gross margin per minute.

     Regulatory and Competitive Environment

     In the United States,  one of the first  liberalized  markets in the world,
competition  began  in the late  1960's  with  MCI's  authorization  to  provide
long-distance  service.  The 1984  court-ordered  dissolution of AT&T's monopoly
over local and long  distance  telecommunications  fostered the emergence of new
U.S.-based long distance  companies.  Today,  there are over 600 U.S.-based long
distance companies, most of which are small- or medium-sized companies,  serving
residential  and  business  customers  and other  carriers.  Liberalization  has
occurred  and is  occurring  elsewhere  around the world,  including  in most EU
nations, several Latin American nations and certain Asian nations.

      On February 15, 1997, the United States and 68 other countries  signed the
WTO Agreement and agreed to open their telecommunications markets to competition
and foreign  ownership  starting January 1, 1998.  These 69 countries  represent
approximately 90% of worldwide  telecommunications traffic. The Company believes
that the WTO Agreement will provide it with significant opportunities to compete
in  markets  where the  Company  could not  previously  access,  and to  provide
end-to-end, facilities-based services to and from these countries.

     Set forth below is a timetable  summarizing the commitments made by parties
to the WTO  Agreement to implement its  provisions.  Special  conditions  and/or
restrictions apply to those countries marked with an asterisk (*).

<TABLE>
<CAPTION>
                                     1998-1999                                     2000 and thereafter
                                     ---------                                     -------------------

<S>                       <C>                     <C>                      <C>                       <C>
EUROPE                    Austria                 Netherlands              Bulgaria                   Romania
                          Belgium                 Norway                   Czech Republic             Slovak Republic
                          Denmark                 Portugal                 Greece                     Turkey
                          Finland                 Spain                    Poland
                          France                  Sweden
                          Germany                 Switzerland
                          Italy                   United Kingdom
                          Luxembourg
AMERICAS                  Brazil*                 El Salvador              Antigua                    Jamaica
                          Canada                  Guatemala                Argentina                  Peru
                          Chile                   Iceland                  Bolivia                    Trinidad
                          Dominican               Mexico                   Grenada                    Venezuela
                             Republic
ASIA/PACIFIC              Australia               Malaysia                 Brunei                     Thailand
  RIM                     Hong Kong*              New Zealand              Pakistan*
                          Japan                   Philippines              Singapore
                          Korea

AFRICA/MIDDLE             Ivory Coast*                                     Israel                     Senegal
  EAST                                                                     Mauritius
</TABLE>


                                       5
<PAGE>


     The FCC has released an order that significantly changes U.S. regulation of
international  services in order to implement  the United  States' "open market"
commitments under the WTO Agreement.  Among other measures,  the FCC's order (i)
eliminated  the  FCC's  Effective  Competitive  Opportunities  ("ECO")  test for
applicants affiliated with carriers in WTO member countries,  while imposing new
conditions  on  participation  by  dominant  foreign   carriers,   (ii)  allowed
non-dominant  U.S.-based  carriers  to enter into  exclusive  arrangements  with
non-dominant  foreign  carriers  and scaled back the  prohibition  on  exclusive
arrangements with dominant carriers and (iii) adopted rules that will facilitate
approval of flexible alternative settlement payment arrangements.

     The Company believes that the FCC order will have the following  effects on
U.S.-based carriers: (i) fewer impediments to investments in U.S.-based carriers
by foreign  entities;  (ii)  increased  opportunities  to enter into  innovative
traffic  arrangements  with foreign  carriers  located in WTO member  countries;
(iii) new  opportunities  to engage in  international  simple resale  ("ISR") to
additional  foreign  countries;  and (iv) modified  settlement  rates offered by
foreign affiliates of U.S.-based  carriers to U.S.-based carriers to comply with
the FCC's settlement rate benchmarks.

     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 United States,  an
international  long  distance  call  typically  originates  on a local  exchange
carrier's  ("LEC")  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.

     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,  satellite-based
facilities and switches, to those that are purely resellers of another carrier's
transmission  facilities.  The largest U.S.-based carriers, such as AT&T, Sprint
and MCI/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.

     Under Accounting Rate Mechanisms,  which has been the traditional model for
handling  traffic  between  international  carriers,  traffic is exchanged under
bilateral carrier agreements,  or operating agreements,  between carriers in two
countries.  Operating agreements generally are three to five years in length and
provide  for the  termination  of traffic  in,  and  return of  traffic  to, the
carriers'  respective  countries at a negotiated  accounting  rate, known as the
Total Accounting Rate ("TAR").  In addition,  operating  agreements  provide for
network  coordination  and  accounting  and  settlement  procedures  between the
carriers.  Both  carriers  are  responsible  for costs and  expenses  related to
operating their respective halves of the end-to-end international connection.

     Settlement  costs,  which typically equal one-half of the TAR, are the fees
owed  to  another   international   carrier  for  transporting  traffic  on  its
facilities.  Settlement costs are reciprocal  between each party to an operating
agreement  at a  negotiated  rate  (which  must be the same  for all  U.S.-based
carriers,  unless the FCC approves an exception).  Additionally,  the TAR is the
same for all carriers transporting traffic into a particular country, but varies
from country to country.  The term  "settlement  costs" arises because  carriers
essentially pay each other on a net basis  determined by the difference  between
inbound and outbound traffic between them.

     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 IRUs 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  IRUs,  however,  require a carrier  to make an  initial  capital
commitment based on anticipated usage.



                                       6
<PAGE>


     In addition to using  traditional  operating  agreements,  an international
long distance  provider may use transit  arrangements,  resale  arrangements and
alternative transit/termination arrangements.

     Transit Arrangements. Transit arrangements involve a long distance provider
in an intermediate  country carrying the long distance traffic  originating in a
second country to the destination third 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.

     Resale  Arrangements.  Resale arrangements  typically involve the wholesale
purchase and sale of  transmission  and  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  that  rely,  at  least in part,  on  transmission  capacity
acquired  on a  wholesale  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 that 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 international  long distance resale market is continually
changing as new long distance resellers emerge and existing providers respond to
changing costs and competitive pressures.

     Alternative  Transit/Termination  Arrangements.  As the international  long
distance market has become  increasingly  competitive,  long distance  providers
have  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  international simple resale ("ISR"),
refiling and  ownership of  transmission  and  switching  facilities  in foreign
countries,  which  enables  a  provider  to  terminate  its  traffic  on its own
facilities.   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  United  States  and other  applicable  regulatory  authorities  only on some
routes, ISR services are increasing and are expected to expand  significantly as
liberalization continues in the international telecommunications market. As with
transit  arrangements,  refiling involves the use of an intermediate  country to
carry  the  long-distance  traffic  originating  in  a  second  country  to  the
destination  third  country.  However,  the key difference  between  transit and
refile  arrangements  is that under a transit  arrangement  the  operator in the
destination country has a direct relationship with the originating  operator and
is aware of the transit  arrangement,  while with refiling,  the operator in the
destination  country typically is not aware that the received traffic originated
in another country with another carrier.  Refiling of traffic takes advantage of
disparities in settlement rates between different  countries by allowing 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. In addition,  new market access
agreements,  such  as  the  WTO  Agreement,  have  made  it  possible  for  many
international   long  distance   providers  to  establish  their  own  switching
facilities in certain  foreign  countries,  allowing them to directly  terminate
traffic, including traffic which they have originated.

     Internet Telephony

     The  Internet  is an  interconnected  global  computer  network  of tens of
thousands of  packet-switched  networks  using  Internet  protocols.  Technology
trends over the past decade have removed the distinction  between voice and data
segments.  Traditionally,  voice conversations have been routed on analog lines.
Today, voice conversations are routinely converted into digital signals and sent
together  with other data over  high-speed  lines.  In order to satisfy the high
demand for low-cost  communication,  software and hardware  developers  began to
develop  technologies  capable of allowing the Internet to be utilized for voice
communications.  Several  companies now offer  services  that provide  real-time
voice conversations over the Internet ("Internet  Telephony").  Current Internet
Telephony does not provide comparable sound quality to traditional long distance
service. The sound quality of Internet Telephony, however, has improved over the
past few years.

     The FCC and most foreign  regulators have not yet attempted to regulate the
companies  that provide the software  and hardware for Internet  Telephony,  the
access providers that transmit their data, or the service  providers,  as common
carriers or  telecommunications  services  providers.  Therefore,  the  existing
systems  of  access  charges  and  international   accounting  rates,  to  which
traditional long distance carriers are subject,  are not imposed on providers of
Internet Telephony  services.  As a result,  such providers may offer calls at a
significant discount to standard international calls.

BUSINESS STRATEGY

     The Company's  objectives  are to (i) become the leading  provider of voice
and data services to select  ethnic  communities  located in major  metropolitan
areas in the  U.S.,  Canada  and  Europe  with  significant  international  long
distance  usage to the emerging  economies;  and (ii)  leverage its  residential
telecommunications  business to become a leading  provider of wholesale  carrier
services  on  corresponding  international  routes.  In  order  to  achieve  its
objectives, the Company's strategy relies on the following elements:



                                       7
<PAGE>

o        Expand the addressable market. The Company currently serves residential
         customers  in 20  major  metropolitan  areas  in the  U.S.  and four in
         Europe.  The Company has also  identified over 40 major markets outside
         the United States,  primarily in Europe and Southeast  Asia,  which the
         Company  believes  are  attractive  for entry based on the  demographic
         characteristics,   traffic   patterns,   regulatory   environment   and
         availability   of  appropriate   advertising   channels.   The  Company
         anticipates  entering up to 30 of these  markets by the end of 2000. In
         addition, the Company seeks to increase its penetration of its existing
         and   prospective   markets  by:  (i)   targeting   additional   ethnic
         communities; (ii) marketing additional routes to existing customers who
         principally  use the  Company's  services  for  one  route,  and  (iii)
         expanding its products and services to include  "dial-1",  prepaid card
         accounts and Internet access.  Subsequent to year end 1998, the Company
         has strategically installed or acquired telecommunications equipment in
         Canada and five  European  cities which allows it to originate  traffic
         from customers in these locations.

o        Achieve  "first-to-market"  entry of select ethnic residential markets.
         The Company believes that it enjoys significant  competitive advantages
         by  establishing  a  customer  base and  brand  name in  select  ethnic
         residential  communities ahead of its competitors.  The Company intends
         to capitalize  on its proven  marketing  strategy to further  penetrate
         select ethnic residential  communities in the United States, Canada and
         Europe ahead of its competitors. The Company selects its target markets
         based on favorable demographics with respect to long distance telephone
         usage, including geographic immigration patterns, population growth and
         income levels.  Targeting  select ethnic  communities  also enables the
         Company to aggregate  traffic along certain  routes (which  reduces its
         costs)   and  to   focus  on   rapidly   expanding   and   deregulating
         telecommunications  markets.  The Company's target residential customer
         base is comprised of emigrants from emerging  markets in Asia,  Eastern
         Europe, the Middle East, the Pacific Rim, Latin America and Africa.

o        Expand  international  network facilities.  The Company plans to expand
         its  international  network  facilities during 1999 and through 2000 by
         deploying  additional  switches,  installing POPs,  securing additional
         ownership  interests  in undersea  cable  facilities  and  investing in
         domestic  cable  facilities,  deploying  ATM/Internet  Protocol  ("IP")
         capabilities  in its network,  investing in or acquiring  two satellite
         earth  stations and entering  into  operating  agreements.  By building
         network facilities and expanding operating agreements that enable it to
         carry an increasing  percentage of its traffic on its own network,  the
         Company believes that it will be able to reduce its transmission  costs
         and reliance on other carriers and ensure greater  control over quality
         of  service.  During  the next  three  years,  the  Company  expects to
         increase  significantly  the volume of its traffic that is  originated,
         carried and terminated on-net.

         The Company  intends to implement a network hubbing  strategy,  linking
         its existing and prospective customer base in the United States, Canada
         and Europe to call  destinations in foreign countries through a network
         of foreign-based  switches and POPs. As part of this hubbing  strategy,
         the Company  has  installed  international  gateway  switches  and POPs
         throughout  the  United  States,  Europe and Asia.  The POPs  aggregate
         traffic  originating  from the  region  around  the city in which it is
         located and route the traffic to the  Company's  international  gateway
         switches. Each of the POPs contains  telecommunications  equipment that
         is scaleable to accommodate the traffic volume demands of each region.

         The Company also plans to continue to enhance its  termination  options
         through additional operating  agreements,  transit arrangements and, if
         appropriate  opportunities arise, strategic acquisitions and alliances.
         The  Company has also taken steps to improve the quality of its network
         by upgrading its network  monitoring and customer service centers,  and
         plans to  install  enhanced  software  that  will  enable  it to better
         monitor call traffic routing, capacity and quality.

o        Maximize network  utilization and efficiency  through wholesale carrier
         business.  The Company intends to continue to market its  international
         long distance services to existing and new carrier  customers.  Because
         the Company's residential minutes of use are generated primarily during
         non-business hours or on weekends, the Company has substantial capacity
         to offer to  international  carriers.  The significant  carrier traffic
         volume  that the  Company  generates  allows it to  capture  additional
         revenues,  to  increase  economies  of  scale  and to  improve  network
         efficiency.

o        Build customer loyalty.  The Company seeks to build long-term  customer
         loyalty through  tailored,  in-language  marketing  efforts focusing on
         each target ethnic  group's  specific  needs and cultural  backgrounds,
         responsive   customer   service  offering   in-language   services  and
         involvement in its customers'  communities through sponsorship of local
         events  and other  activities.  The  Company  markets  its  residential
         services under the "Startec" name to enhance its name  recognition  and
         build brand loyalty in its target communities.  The Company maintains a
         detailed  information  database  of its  customers,  which  it  uses to
         monitor  usage,  track customer  satisfaction  and analyze a variety of
         customer behaviors, including retention and frequency of usage.



                                       8
<PAGE>


o        Expand service  offerings to customers.  The Company  intends to expand
         its service  offerings to ethnic  communities by: (i) deploying  ATM/IP
         telephony throughout its network;  (ii) creating Virtual Communities on
         its  current  Web site to connect  customers  from and in the  emerging
         economies;  (iii) offering Internet Access services to customers in the
         U.S.; and (iv) providing  co-location and Web hosting facilities at its
         main international gateway sites in New York and Los Angeles as well as
         in Miami, where an international gateway site is scheduled to go online
         in the second quarter of 1999.

o        Pursue strategic acquisitions and alliances. In order to accelerate its
         business   plan   and   take   advantage   of  the   rapidly   changing
         telecommunications   environment,  the  Company  intends  to  carefully
         evaluate and pursue strategic acquisitions, alliances and investments.

     As part of its network deployment strategy, the Company is pursuing various
acquisitions and alliances.  In 1998 and early 1999, the Company  completed four
acquisitions.  In September 1998,  Startec acquired all of the outstanding stock
of  Trans  Pacific  Technology,  Inc.,  a  signatory  owner  of the  Sea-Me-We-3
("SMW-3")  undersea  cable  consortium.  The SMW-3 cable  connects 34  countries
across Europe, the Middle East, and Asia. In December 1998, Startec acquired all
of the outstanding  stock of PCI  Communications,  Inc.  ("PCI"),  a provider of
voice,  data and Internet  services located on the island of Guam in the Pacific
Rim. Through PCI, Startec obtained capacity on the TPC-5,  Guam-Philippines  and
China-U.S.  undersea fiber optic cables. The Company also intends to expand upon
PCI's "dial-1" and ISP services,  which it currently  markets to residential and
business  customers  in Guam,  and will make the Guam  location an Asian hub for
Startec's  network.   Both  acquisitions   bolstered  Startec's  Asian  network,
improving  its ability to transmit  calls on its  managed  network.  In December
1998, Startec acquired Global Communications GmbH ("Global") in Germany.  Global
has  a  Class  IV  nationwide   telecommunications   license  for  Germany,   an
interconnection  agreement  with  Deutsche  Telekom  and a Siemens  EWSD  switch
located in  Dusseldorf.  The  Siemens  EWSD  switch has  already  completed  the
Interoperability (IOP) certification testing required by Deutsche Telekom, which
typically takes 10 to 12 months to complete.

     In February  1999,  the Company  announced the  acquisition of 64.6% of the
outstanding  shares  of  Phone  Systems  and  Network,  S.A  ("PSN"),  a  French
switch-based reseller of long distance services.  PSN operates switches in Paris
and  Switzerland  and  has  over  14,000  residential  and  business  customers.
Additionally,  it holds the L34.1  license  in  France,  allowing  it to provide
nationwide telecommunications services. In February 1999, the Company acquired a
20%  ownership in a Nevada  holding  company with  operations  in Europe.  These
acquisitions,  combined with the Global acquisition,  have accelerated Startec's
entry into the  European  markets and provide  important  licensing  and network
components.

MARKET OPPORTUNITY

     According  to  industry  sources,   the  international   telecommunications
industry generated  approximately $67 billion in revenues and 81 billion minutes
of  use  during  1997.   Industry  sources   indicate  that  the   international
telecommunications  market is one of the  fastest  growing  and most  profitable
segments of the global telecommunications  industry. It is estimated that by the
end of 2001,  this market will have  expanded to $98 billion in revenues and 153
billion minutes of use,  representing  compound annual growth rates from 1997 of
10%  and  17%,  respectively.   The  highly  competitive  and  rapidly  changing
international  telecommunications  market has created a significant  opportunity
for carriers that can offer high-quality,  low-cost  international long distance
service.

     Based  on  industry  estimates,  approximately  70% of  international  long
distance traffic was generated between North America and Western Europe in 1997.
The Company's  target market consists of a significant  portion of the remaining
30% of the international long distance traffic,  or approximately $20 billion in
revenues and 24 billion minutes of use. The Company believes that  international
long  distance  usage in its target  markets will grow at rates in excess of the
international telecommunications market as a whole, primarily as a result of (i)
continuing economic development in these markets with a corresponding investment
in  telephone  and   telecommunications   infrastructure   and  (ii)  continuing
deregulation of these markets.

CUSTOMERS

     The Company markets its international  long distance services  primarily to
two  customer   groups:   residential   ethnic   communities   with  significant
international long distance usage and international long distance carriers.  The
Company's residential 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.  The  number of such
customers has grown  significantly  over the past three years, from 10,675 as of
December  31,  1995 to  122,057 as of  December  31,  1998.  Net  revenues  from
residential  customers  accounted  for  approximately  33%,  33%  and 37% of the
Company's  net revenues in the years ended  December  31,  1998,  1997 and 1996,
respectively.  As part of its  strategy,  the  Company  seeks  to  increase  the
proportion of its net revenues derived from residential customers.

     The Company  also  offers  wholesale  telecommunications  services to other
international  long distance  carriers,  which allows the Company to balance its
residential  customer  base and  efficiently  use its  network  capacity.  These
carrier  customers include first- and second-tier long distance carriers seeking
competitive  rates and  high-quality  transmission  capacity.  The number of the
Company's




                                       9
<PAGE>


carrier  customers  has  grown  significantly  since  the  Company  first  began
marketing  its services to this  segment in late 1995.  As of December 31, 1998,
the Company had 53 carrier customers.  Revenues from carrier customers accounted
for 67%, 67% and 63% of the Company's  net revenues in the years ended  December
31, 1998, 1997 and 1996, respectively.  During the year ended December 31, 1998,
the Company's five largest carrier customers  accounted for 61% of net revenues,
with  MCI/WorldCom  accounting  for  35%  of net  revenues.  No  other  customer
accounted for 10% or more of the Company's net revenues during 1997. In a number
of cases, the Company  provides  services to carriers that are also suppliers to
the Company. 

SERVICES AND MARKETING

       Residential Customers

     The Company generally  provides  international  and interstate  residential
long distance  customers with  dial-around  long distance  service.  Residential
customers  access  Startec's  network by dialing its CIC code before dialing the
number they are calling, enabling them to use the Company's services at any time
without changing their existing long distance carrier.

     The Company  invests  substantial  resources in identifying  and evaluating
potential markets for its services. In particular, the Company seeks to identify
ethnic groups with demographic  profiles that suggest significant  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 focused print advertising in ethnic newspapers,  advertising on ethnic
radio and television stations,  direct mail and sponsorship of ethnic events and
customer referrals. The Company also sponsors and attends community events.

     Potential  customers  call a toll  free  number  that  appears  in  Company
advertising   and   are   connected   to   a   multilingual   customer   service
representatives.   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 Startec's  services.  Once the customer  begins to use the
services,  the Company  routinely  monitors usage and periodically  communicates
with the customer to gauge service  satisfaction.  Startec 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's  customer  service  center,  which  services the Company's
residential customer base, is staffed by trained,  multilingual customer service
representatives,  and  operates 24 hours a day,  seven days a week.  The Company
currently employs approximately 184 customer service representatives.

     Although  the  Company  is  sensitive  to the role  that the  price of long
distance  service  plays in consumer  decision  making,  it  generally  does not
attempt to be the low-price  leader.  Instead,  the Company focuses on providing
overall value to its customers,  combining  competitive pricing with high levels
of service,  customer representatives fluent in the customers' native languages,
focused marketing  campaigns directed at their ethnic groups, and involvement in
their communities through sponsorship of local events and other activities.  The
Company  believes that this strategy  increases usage of Startec's  services and
enhances customer loyalty and retention.

     In addition to its current long distance services,  the Company continually
evaluates  potential  new service  offerings  in order to  increase  traffic and
enhance  customer  loyalty and  retention.  New services the Company  expects to
introduce  include Home Country Direct  Services,  which will provide  customers
with access to  Startec's  network from any country and will allow them to place
either collect or credit/debit  card calls;  prepaid domestic and  international
calling  cards,  which may be used from any  touchtone  telephone  in the United
States, Canada or Europe, and "dial-1" service for U.S. customers.

     Carrier Customers

     To maximize the efficiency of its network  capacity,  the Company sells its
international  long  distance  services  to  other  telecommunications carriers.
Startec 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 has a dedicated
marketing team serving the carrier market,  including  approximately  31 carrier
service representatives.  In addition, the Company participates in international
carrier membership  organizations,  trade shows,  seminars and other events that
provide its carrier  marketing staff with additional  opportunities to establish
and maintain relationships with other carriers that are potential customers. The
Company's  strategy is to focus its marketing  efforts on first- and second-tier
carriers.  The Company  generally  avoids  providing  services  to  lower-tiered
carriers because of potential  difficulties in collecting  accounts  receivable.
Because carrier customers  generally are extremely price sensitive,  the Company
closely tracks the prices of competitors serving the carrier market and monitors
its own network costs to ensure optimal pricing for its carrier customers.



                                       10
<PAGE>

     Future Service Offering

     The Company is  incorporating  state-of-the-art  technology  in its network
infrastructure. It intends to expand its service offerings to ethnic communities
by: (i) deploying ATM/IP telephony throughout its network; (ii) creating Virtual
Communities  on its  current  web  site to  connect  customers  from  and in the
emerging economies;  (iii) offering Internet access services to customers in the
U.S.;  and (iv)  providing  co-location  and web hosting  facilities at its main
international  gateway sites in New York and Los Angeles as well as at its Miami
international  gateway site,  which is scheduled to be operational in the second
quarter of 1999.


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 the  over  200  countries  that  have  telecommunications
capabilities.  The Company has been expanding its network to match  increases in
its long distance traffic volume and to support the needs of its customers.  The
network employs advanced  switching  technologies and is supported by monitoring
facilities and the Company's technical support personnel.

     Customer Call Centers

     As a part of its  dedication to customer  service,  the Company  intends to
build three customer service centers in Bethesda,  Maryland,  Guam and Europe in
1999.  Each  center  will  operate  24 hours a day,  seven  days a week and will
accommodate  approximately  150 customer service  representatives.  The Bethesda
center will  support the  languages of the Middle East and Central  Europe;  the
Guam center will support Asian languages, while the European center will support
the languages of Western Europe.

     Switching and Transmission Facilities

     The Company currently  operates a Nortel DMS 250/30  international  gateway
switch in New York City and a Nortel  GSP  international  gateway  switch in Los
Angeles,  California.  The Company is also installing a Nortel GSP international
gateway  switch in Miami,  as well as at a second site in New York, New York. In
December 1998, the Company acquired a Siemens EWSD switch in Dusseldorf, Germany
through the  acquisition  of Global  Communications  GmbH. In February 1999, the
Company  acquired  a  Telesoft  Okoford  switch in  Paris,  France  through  the
acquisition  of a majority  interest in Phone Systems  Network.  The Company has
also  installed  POPs  in the  U.S.  and  Europe.  The  POPs  aggregate  traffic
originating from the region around the city in which it is located and route the
traffic to the  Company's  international  gateway  switches.  Each POP  contains
telecommunications equipment that is scaleable to accommodate the traffic volume
demands of each region. The Company currently has 15 switch and POP sites in the
U.S., Europe and Asia.

     The  Company's  international  expansion  strategy  is  predicated  on  the
installation  of multiple  switches and POPs  throughout the world.  The Company
plans to acquire multiple  international  gateway switches and POPs through 2000
to be installed in (i) Europe: the U.K., France, Germany, Spain, Belgium, Italy,
Austria, Denmark, Ireland, Switzerland, Greece and Portugal; (ii) North America:
the U.S., Canada,  and Mexico;  (iii) Asia and the Pacific Rim: Guam, Hong Kong,
Singapore  and India;  and (iv) Latin and South  America:  Argentina and Brazil.
These  switches will be deployed in 1999 and 2000.  As the Company  executes its
expansion  strategy,  encounters  new  marketing  opportunities  and employs new
technology,  management may elect to relocate or redeploy certain switches, POPs
and other network equipment to alternate locations from what is described above.

     The  Company  generally  installs  switches  and POPs in  regions  where it
believes it can achieve one or more of the following  goals: (i) originate calls
from its own customer  base,  (ii) transmit  calls  originated  elsewhere on its
network to the call's final destination on a more cost-efficient basis, or (iii)
terminate calls  originated and carried on its own network.  The Company intends
to use the  switches  and POPs to be  installed  in the U.S.,  Canada and Europe
primarily  to  carry  calls  originated  in  those  countries  by the  Company's
customers.  The switches and POPs that the Company  plans to install in Asia and
the Pacific Rim and in Latin and South America will be used both as "hubbing" or
transit sites and to terminate calls originated in other countries.

     Startec  currently  owns IRUs on 13 cable  systems,  including the Canus-1,
Cantat-3,  Columbus II, Gemini,  TAT 12/13,  TAT 14, Atlantic  Crossing,  TPC-5,
Guam-Philippines,  China-US,  and FLAG cables,  and is a signatory  owner on the
Columbus III and Sea-Me-We 3 cables. It accesses additional cables and satellite
facilities  through  arrangements with other carriers.  During 1999, the Company
intends to invest in domestic  land-based fiber optic cable  facilities  linking
the East Coast and West Coast of the United  States and in undersea  fiber optic
transmission facilities linking North America with Europe, the Pacific Rim, Asia
and Latin America.  The Company believes that it may achieve substantial savings
by acquiring  additional  interests in fiber optic cable, which would reduce its
dependence on leased cable access.  Having an ownership  interest  rather than a
lease  interest  in such 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, 



                                       11
<PAGE>

which  permits the Company to maximize  cable  utilization  while  reducing  the
Company's  need to acquire  additional  capacity.  In addition to increasing its
interests in fiber optic cable  facilities,  the Company intends to invest in or
acquire  two  satellite  earth  stations  in 1999,  which  will  provide it with
additional  routing  flexibility,  and the ability to connect  with  carriers on
lower-volume routes and carriers in countries where international cable capacity
has not yet become available.

     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 53 carriers.  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.  As traffic across its owned facilities
increases,  management believes the Company will realize operating  efficiencies
and improve its margins.

     The Company intends to incorporate additional  state-of-the-art  facilities
in its  network  architecture,  including  ATM/IP  capabilities.  The Company is
evaluating a number of existing products for implementation into its network. By
incorporating  this  technology,  the Company  expects to realize  lower overall
transmission costs.

     Operating Agreements and Other Termination Arrangements

     Startec 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's  strategy is based on its ability to enter into and maintain:
(i)  operating  agreements  with  PTTs in  countries  that  have  yet to  become
liberalized so that the Company would then be permitted to terminate traffic in,
and receive return traffic from,  that country;  (ii) operating  agreements with
PTTs and emerging carriers in foreign countries whose telecommunications markets
have  liberalized so it can terminate  traffic in such  countries;  (iii) resale
agreements  and  transit and refile  arrangements  to  terminate  its traffic in
countries with which it does not have operating  agreements so as to provide the
Company  multiple  options  for  routing  traffic;   and  (iv)   interconnection
agreements with the PTT in each of the countries where the Company plans to have
operating  facilities  so that it can terminate  traffic in that country.  As of
December  31,  1998,  Startec had 40  operating  agreements,  which will provide
direct access to 36 countries after full  implementation.  At December 31, 1998,
23 of  the  40  agreements  have  been  implemented  with  the  remainder  to be
implemented  during  1999.  These  operating  agreements  allow the  Company  to
terminate  traffic  at lower  rates  than by resale in  markets  where it cannot
establish an on-net connection due to the current  regulatory  environment.  The
Company believes that it would not be able to serve its customers at competitive
prices without such operating or interconnection  agreements. In addition, these
operating  agreements  provide a source of  profitable  return  traffic  for the
Company.  Termination of such  operating  agreements by certain of the Company's
foreign  carriers or PTTs could have a material  adverse effect on the Company's
business.

     Network Operations and Technical Support

     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,  and has developed  and uses  proprietary
software  that  enables  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.  While the Company
performs the majority of the maintenance of its network, it also has service and
support  agreements  with Nortel and  Siemens  covering  its New York City,  Los
Angeles,  Miami and Washington,  D.C.  switches.  The Company depends upon third
parties with respect to the  maintenance of facilities  which the Company leases
and fiber optic cable lines in which it has an IRU or other use arrangements.

     The Company utilizes 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
the utilization of 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 




                                       12
<PAGE>


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 uses 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 call data to corporate
headquarters  for use in  customer  service and  traffic  analysis.  The Company
maintains  these  independent  and redundant  billing systems in order to 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.

     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 the customer's  LEC. The Company  utilizes a third party
billing company which has arrangements  with the LECs 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 its own billing and collection agreements directly with certain LECs, which
management  expects will provide the Company  with  opportunities  to reduce the
costs  currently  associated  with  billing and  collection  practices.  Carrier
customers are billed directly by the Company.

COMPETITION

     The international  telecommunications industry is intensely competitive and
subject to rapid change  precipitated  by changes in the regulatory  environment
and advances in technology.  The Company's  success  depends upon its ability to
compete  with a variety  of other  telecommunications  providers  in the  United
States and in each of its international markets, including the respective PTT in
each  country in which the  Company  operates or plans to operate in the future.
Other competitors of the Company include large,  facilities-based  multinational
carriers  such as AT&T,  Sprint and  MCI/WorldCom  and smaller  facilities-based
wholesale long distance service providers in the United States and overseas that
have  emerged  as  a  result  of  deregulation,   switched-based   resellers  of
international  long  distance  services and global  alliances  among some of the
world's  largest  telecommunications  carriers,  such  as  Global  One  (Sprint,
Deutsche Telekom and France Telecom).  The  telecommunications  industry is also
being impacted by a large number of mergers and  acquisitions  including  recent
announcements  regarding a proposed  joint  venture  between  the  international
operations of AT&T and British Telecom, the proposed acquisition of TCI by AT&T,
and the  proposed  mergers  of SBC and  Ameritech  and  GTE and  Bell  Atlantic.
International  telecommunications  providers such as the Company  compete on the
basis of price,  customer  service,  transmission  quality,  breadth  of service
offerings and value-added services. Residential customers frequently change long
distance  providers  in response  to  competitors'  offerings  of lower rates or
promotional  incentives.   In  general,  because  the  Company  is  currently  a
dial-around  provider,  its  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
international  long distance  telecommunications  providers,  and are especially
price sensitive.  In addition, many of the Company's competitors enjoy economies
of scale that can result in a lower cost structure for  termination  and network
costs, which could cause significant  pricing pressures within the international
communications  industry.  Several long  distance  carriers in the United States
have introduced  pricing  strategies that provide for fixed,  low rates for both
international  and  domestic  calls  originating  in the United  States.  Such a
strategy,  if widely  adopted,  could  have an adverse  effect on the  Company's
business,  financial  condition  and  results  of  operations  if  increases  in
telecommunications usage do not result or are insufficient to offset the effects
of such price decreases.  In recent years,  competition has intensified  causing
prices for  international  long  distance  services to  decrease  substantially.
Prices are  expected to continue to decrease in most of the markets in which the
Company currently competes. The Company believes, however, that these reductions
in prices have been and will continue to be more than offset by reduction in the
cost to the  Company of  providing  such  services.  The  Company  expects  that
competition  will continue to intensify as the number of new entrants  increases
as a result of the new opportunities created by the 1996 Telecommunications Act,
implementation  by the  FCC of the  United  States'  commitment  to the  WTO and
changes in legislation and regulation in various  foreign target markets.  There
can be no assurance that the Company will be able to compete successfully in the
future.

     The telecommunications  industry is also experiencing change as a result 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-based  systems, such as those proposed by Iridium
LLC and Globalstar,  L.P.,  utilization of the Internet for international  voice
and data communications and digital wireless  communication systems such as PCS.
The  Company is unable to predict  which of many  possible  future  product  and
service offerings will be important




                                       13
<PAGE>


to maintain its competitive  position or what  expenditures  will be required to
develop and provide such products and services.

GOVERNMENT REGULATION

Overview

     Startec's  business is subject to varying  degrees of  regulation by United
States  regulatory  authorities  at the federal and state  level,  as well as by
foreign  regulatory  authorities.   In  recent  years,  the  regulation  of  the
telecommunications  industry  has  been in a state  of flux as a  result  of the
passage of new laws seeking to foster greater competition in  telecommunications
markets.  In particular,  comprehensive  amendments to the Communications Act of
1934, as amended  ("1934 Act") were made by the  Telecommunications  Act of 1996
("1996 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.  State  legislatures  also have
passed  new  laws  increasing  competition.  The FCC and  state  public  service
commissions  ("PSCs") have adopted many rules to implement new  legislation  and
encourage competition.  These changes, which are still incomplete,  have created
new opportunities for Startec and its competitors.

     U.S. federal laws,  including common carriage  requirements  under the 1934
Act and the  FCC's  rules,  apply  to  Startec's  international  and  interstate
facilities-based and resale  telecommunications  services.  Applicable PSCs have
jurisdiction  under  separate state  statutes over  telecommunications  services
originating  and  terminating  within  the  same  state.  The FCC  and the  PSCs
generally have the authority to condition,  modify, cancel,  terminate or revoke
Startec'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 Startec's business,  financial condition
and results of operations.

     In addition,  the laws of other  countries  directly apply only to carriers
doing business in those countries.  Startec is affected  indirectly by such laws
insofar as it is doing  business in foreign  countries,  and  indirectly  to the
extent that such laws affect foreign carriers with which Startec does business.

     The following  summary of regulatory  developments and legislation does not
purport to describe all present and  proposed  U.S. or foreign  regulations  and
legislation   affecting  the   telecommunications   industry.   Other   existing
regulations  are  currently  the  subject of judicial  proceedings,  legislative
hearings or administrative proposals which could change, in varying degrees, the
manner  in  which  this  industry   operates.   Neither  the  outcome  of  these
proceedings,  nor their impact upon the  telecommunications  industry or Startec
can be predicted at this time. There can be no assurance that future  regulatory
judicial  and  legislative  changes will not have a material  adverse  effect on
Startec,  that  U.S.  or  foreign  regulators  or third  parties  will not raise
material  issues with  regard to  Startec's  compliance  or  noncompliance  with
applicable laws and regulations,  or that regulatory  activities will not have a
material adverse effect on Startec's  business,  financial condition and results
of operations.

                                       14
<PAGE>



U.S. Federal Regulation

     INTERNATIONAL  COMMON  CARRIER  SERVICES.  In February  1997, 69 countries,
including  the United  States,  Japan,  and all of the member  states of the EU,
signed the World Trade Organization Basic Telecommunications  Services Agreement
("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  and within  varying  timeframes  to allow  access to their
domestic and international  markets to competing  telecommunications  providers,
allow foreign ownership  interests in existing  telecommunications  carriers 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 applicability to companies from WTO member and non-member  countries
of  equivalency  and  other  reciprocity   principles  regarding   international
facilities-based and resale services,  foreign ownership limitations and foreign
carrier entry into the U.S. market. 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 Startec.  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,  Startec is unable to predict the effect the
WTO Agreement  and related  developments  might have on its business,  financial
condition and results of operations.

     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, Startec 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.  Startec was also  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 and
international television services to various overseas points.

     On August 27, 1997, Startec was granted global facilities-based Section 214
authority  under  new FCC  streamlined  processing  rules  adopted  in 1996  for
international  carriers.  Startec  is  classified  by the FCC as a  non-dominant
carrier on its  international  and domestic  routes. A  facilities-based  global
Section  214  authorization  enables  Startec  to  provide  international  basic
switched, private



                                       15
<PAGE>



line,  data,  television and business  services using  authorized  facilities to
virtually  all  countries  in the  world.  In March  1999,  the FCC  once  again
streamlined its rules for licensing and regulating international carriers. Among
other  things,  under the most recent  rules a carrier  with global  Section 214
authorization  for  facilities-based  services  will be allowed  to utilize  any
foreign   submarine   cable  system  in  its   provision   of   facilities-based
international services without additional authorization.

     Under FCC rules  which took  effect on  February  9, 1998,  upon entry into
force  of  the  WTO  Agreement  of  February  5,  1998,  the  FCC  replaced  the
"equivalency"  test with a rebuttable  presumption  in favor of the provision of
switched  services  over  interconnected  private lines  ("international  simple
resale" or "ISR") to WTO member countries.  The FCC will authorize the provision
of ISR 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 the FCC's test for  equivalent ISR policies.
The FCC will authorize ISR 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,   and  the  country  satisfies  the  FCC's
equivalency test. To date, the FCC has approved ISR for  international  services
between the U.S. and eighteen foreign countries,  including Australia,  Austria,
Belgium,  Canada,  Denmark,  France,  Germany, Hong Kong, Ireland, Italy, Japan,
Luxembourg,  the Netherlands,  New Zealand, Norway, Sweden,  Switzerland and the
United Kingdom. It is possible that ISR may be approved for additional countries
in the future.  Pursuant to FCC rules and policies,  Startec's  authorization to
provide  service via ISR will be  expanded  automatically  to include  countries
subsequently approved by the FCC for ISR.

     Startec must also conduct its international business in compliance with the
FCC's international  settlements policy ("IS Policy"). The IS Policy 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 IS
Policy,  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 IS Policy 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


                                       16
<PAGE>



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  with  market  power.  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.

     In 1996, the FCC amended the IS Policy to provide carriers with flexibility
to introduce  alternative payment  arrangements that deviate from the IS Policy.
As a result of the WTO  Agreement,  the FCC created a rebuttable  presumption in
favor of alternative payment  arrangements with WTO member countries.  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.  While these rule  changes may provide  more
flexibility  to  Startec  to  respond  more  rapidly  to  changes  in the global
telecommunications market, it will also provide similar flexibility to Startec's
competitors.  Startec  intends,  where  possible,  to take  advantage of lowered
accounting rates and more flexible settlement arrangements.

     As  of  December   31,  1998,   Startec  had   operating   agreements   and
interconnection  arrangements  with  carriers  in  approximately  40  countries,
primarily in emerging economies. FCC regulations require that 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.  Startec  has  filed,  or will file,  each of its  operating
agreements  with the FCC as required.  The FCC's rules also  require  Startec to
file periodically a variety of reports regarding its international traffic flows
and use of international facilities.  Startec has on file and maintains with the
FCC annual circuit  status  reports and traffic data reports.  An FCC rulemaking
proceeding  is  pending in which it has  proposed  to reduce  certain  reporting
requirements  of common  carriers.  Startec is unable to predict  the outcome of
this proceeding or its effect on Startec.


                                       17
<PAGE>



     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 Startec'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
Startec's business, financial condition and results of operations.

     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 Startec reported the only foreign carrier
investment in Startec at the time, an affiliate of Portugal  Telecom.  Under the
FCC's new rules implementing the WTO Agreement, which took effect on February 9,
1998 the threshold for  notification of affiliations  with foreign  carriers has
been  increased to 25%. Under the new rules,  Startec is affiliated  with Global
Communications  GmbH,  a licensed  carrier in  Germany,  and Phone  Systems  and
Network,   S.A.,   a  licensed   carrier  in  France.   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.  None of the  carriers  with  which
Startec is affiliated  are  considered  dominant in their foreign  markets,  and
Startec is not regulated as dominant on any international route.

     The  FCC  may   condition,   modify  or  revoke  any  of  the  Section  214
authorizations  granted to Startec 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 Startec's  business,  financial  condition
and results of operations.

     INTERNET  SERVICES,  IP  TELEPHONY  AND  ADVANCED  SERVICES.  In the  U.S.,
Internet  services,  including  voice  communications  over the  Internet  or IP
protocols ("Internet  Telephony") currently are treated as enhanced services and
may be provided on an unregulated  basis.  In December 1996, the FCC initiated a
Notice of Inquiry (the "Internet NOI") regarding  whether to impose  regulations
or surcharges upon providers of Internet access and  information  services.  The
Internet NOI  specifically  identifies  Internet  Telephony as a subject for FCC
consideration.  This proceeding remains pending.  In April 1998, the FCC filed a
report with  Congress  stating that  Internet  access falls into the category of
information  services,  and should not be subject to common carrier  regulation,
including the  obligation to pay access  charges,  but that the record  suggests
that  some  forms  of  Internet  services  may be more  like  telecommunications
services than  information  services,  and possibly  should be subject to common
carrier   regulation.   To  date,  all  aspects  of  Internet  Telephony  remain
unregulated. However, for the purpose of assisting in a



                                       18
<PAGE>



determination of whether reciprocal  compensation for traffic bound for Internet
service providers is due between competing local exchange carriers, FCC recently
has  determined  that  Internet  services  are  interstate  rather than local in
nature.  A petition for review of this  decision has been filed by Bell Atlantic
in the U.S. Court of Appeals for the Eighth Circuit.  Controversy  over this and
related issues may lead to changes in federal or state  regulatory  treatment of
Internet  related  services.   Startec  cannot  predict  the  outcome  of  these
proceedings.

     In addition,  several  efforts have been made to enact federal  legislation
that would either regulate or exempt from regulation  services provided over the
Internet.  State public  utility  commissions  may also retain  jurisdiction  to
regulate the provision of intrastate Internet telephone  services.  If Congress,
the FCC, or a state utility  commission begins to regulate  Internet  Telephony,
there  can be no  assurances  that  any  such  regulation  will  not  materially
adversely  affect our business,  financial  condition or results of  operations.
Similarly,  certain foreign  governments have begun to consider more closely the
regulatory status of Internet services, especially Internet Telephony. We cannot
predict  the  likelihood  that U.S.  federal  or state  authorities  or  foreign
governments will impose additional regulation on our Internet-related  services,
nor  can  we  predict  the  impact  that  future  regulation  will  have  on our
operations.

     The FCC also has  initiated  proceedings  addressing  the  availability  of
advanced  communications  services to all  Americans.  In February 1999, the FCC
issued a report in a inquiry proceeding  concluding that no significant  changes
in existing  policies are presently,  but that it should continue to monitor the
deployment of broadband  services and issue another report in the year 2000. The
Commission said that in the meantime it will continue to allocate,  auction, and
license more radio spectrum for uses that include broadband data transmission.

     In a related rulemaking,  the FCC has developed new rules on a wide variety
of issues  associated  with the  provision  of  advanced  services  by  wireline
carriers.  The FCC clarified  that the  interconnection,  unbundling  and resale
obligations of incumbent local exchange carriers  ("ILECs") under Section 251 of
the 1996 Act  extend to their  provision  of  advanced  services,  and  proposed
measures  to promote  the  deployment  of  advanced  services  by both ILECs and
competitive local exchange carriers  ("CLECs").  In rules adopted in March 1999,
the FCC required expanded physical collocation rights for CLECs and strengthened
the rights of CLECs to order  unbundled  network  elements  required  to provide
advanced services.  However, the FCC also interpreted the 1996 Act as permitting
ILECs to deploy advanced services through separate affiliates which would not be
regulated  as an ILEC.  These  new  rules  should  enhance  the  flexibility  of
Startec's options for terminating advanced services,  but Startec cannot predict
the final outcome of these proceedings or any court appeals that might ensue.

     INTERSTATE  INTEREXCHANGE  SERVICES.  Startec'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 Startec's  domestic  services are provided.  Startec must
comply with the requirements of common carriage under the of 1934 Act.  Pursuant
to the 1934 Act, Startec is subject to the general  requirement that its charges
and  regulations for  communications  services must be "just and reasonable" and
that it may not make any "unjust or unreasonable  discrimination" in its charges
or regulations. Carriers such as Startec also are subject to a variety



                                       19
<PAGE>



of miscellaneous  regulations  that, for instance,  govern the documentation and
verifications  necessary to change a consumer's long distance  carrier,  require
the  filing  of  periodic  reports,  and  restrict  interlocking  directors  and
management.  Startec also has filed domestic long distance tariffs with the FCC.
The FCC also has jurisdiction to act upon complaints  against any common carrier
for failure to comply with its statutory obligations.

     The FCC has  established  different  levels of regulation  for dominant and
non-dominant  carriers.  Among domestic common carrier service  providers,  only
GTE,  the RBOCs and other ILECs are  classified  as dominant  carriers,  and all
other  providers of domestic common carrier  services,  including  Startec,  are
classified  as  non-dominant  carriers.  The 1996 Act  provides the FCC with the
authority  to forebear  from  imposing  any  regulations  it deems  unnecessary,
including requiring  non-dominant carriers to file tariffs. In November 1996, in
its first major exercise of regulatory forbearance authority granted by the 1996
Act, the FCC issued an order detariffing domestic  interexchange  services.  The
order  required  mandatory  detariffing  and gave  carriers such as Startec nine
months to withdraw  federal tariffs and move to contractual  relationships  with
its  customers.  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  stayed the FCC's order  pending  judicial  review.  The appeals  remain
pending.

     Should the appeals fail and the FCC's order become  effective,  Startec 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  Startec  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 Startec's  customer base involves  "casual calling"  customers,  the
potential  absence of tariffs  could  require  Startec 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  Startec to
maintain tariffs on file with the FCC.

     The 1996 Act directs  the FCC, in  cooperation  with state  regulators,  to
establish a Universal  Service  Fund  ("USF")  that will  provide  subsidies  to
carriers  that  provide  service to  under-served  individuals  and in high cost
areas.  A portion  of  carriers'  contributions  to the USF also will be used to
provide telecommunications related facilities for schools, libraries and certain
rural health care  providers.  The FCC released its order in June 1997.  For the
first and second calendar  quarters of 1998, the FCC  established  payment rates
for all interexchange  carriers that amount to 3% to 4% of eligible  intrastate,
interstate, and international long distance service revenues.

     In July 1998, the FCC extended by six months,  or to July 1, 1999, the date
on which so-called  "non-rural" LECs will first receive  explicit  subsidies for
the services provided to rural  subscribers.  Implementation of the subsidy will
increase burdens on interexchange  carriers that must contribute to the USF. The
FCC allows  interexchange  carriers to recover the  international and interstate
portions of these  payments by passing the charges  through to their  customers.
Certain  features of the universal  service funding  mechanism have not yet been
finalized,  including  the input values for the cost of network  components  and
other parameters that will be used in econometric  models to estimate  non-rural
carriers' reimbursable costs for providing



                                       20
<PAGE>



supported  services.   Also,  the  FCC's  implementation  of  universal  service
requirements  remains subject to judicial and additional FCC review.  Startec is
unable to  predict  the  potential  impact of these  universal  service  funding
reforms. Based upon its domestic interexchange revenues,  Startec has applied to
the FCC for a waiver of USF  contribution  requirements.  Startec cannot predict
the likelihood that its request will be granted.

     CASUAL CALLING ISSUES. The FCC has adopted new rules that expand the number
of codes  available for casual  calling  services.  An increase in the number of
codes  available  for casual  calling  allows 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
its region,  subject to a demonstration to the FCC and state regulators that the
RBOC 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.

     Some  RBOCs have filed  applications  with  various  state  public  utility
commissions and the FCC seeking approval to offer in-region  interLATA  service.
Some states have denied  these  applications  while others have  approved  them.
However,  to date,  even  where the  RBOCs'  applications  have  received  state
approval the FCC has denied each of the RBOCs'  applications  brought before it.
The grant of such  authority  could  permit RBOCs to compete with Startec in the
provision of domestic and international long distance services.

     On December 31, 1997, in striking down an FCC order concerning  requests by
SBC, US West and Bell  Atlantic  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.  In September
1998,  the U.S.  Court of Appeals for the Fifth  Circuit  reversed  the District
Court's decision that the challenged  provisions of the 1996 Act were prohibited
"bills of attainder." In January 1999, the U.S. Supreme Court declined to review
the Fifth Circuit's decision. A separate petition remains pending at the Supreme
Court for review of a decision by the U.S.  Court of Appeals for the District of
Columbia rejecting similar claims by BellSouth.

     To  originate  and  terminate  calls in  connection  with  providing  their
services, long distance carriers such as Startec must purchase "access services"
from ILECs or CLECs. Access charges



                                       21
<PAGE>



represent a significant portion of Startec'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.  In May 1997, the FCC
released an order that  fundamentally  restructured  the "access  charges"  that
ILECs  charge to  interexchange  carriers  and end user  customers.  Appeals  by
numerous  parties were denied by the Eighth  Circuit  Court of Appeals on August
19,  1998.  Subsequently,  the  FCC  proposed  various  measures  to  accelerate
reductions in ILEC access charges and to give ILECs increased flexibility to set
prices in response to competition.  Together,  these actions could significantly
reduce  the  prices  of  ILEC  access  services  to  Startec,  as well as to its
competitors.

     In implementing the local  competition  provisions of the 1996 Act, the FCC
has  promulgated a series of rules regarding  interconnection  between ILECs and
CLECs.  The  issues  addressed  by  the  FCC  have  included   requirements  for
non-discriminatory  interconnection,   access  to  unbundled  network  elements,
physical collocation of equipment,  transport and termination  charges,  pricing
methodologies,  resale requirements and access to rights of way. Most provisions
of the FCC's orders  adopting these  interconnection  rules were  appealed,  and
numerous appeals were consolidated for consideration by the Eighth Circuit. In a
decision released in July 1997 and modified in August 1997, the Court of Appeals
upheld in part and reversed in part the FCC's  orders.  In  addition,  in August
1998, the Eighth Circuit issued a ruling in a related appeal upholding the FCC's
regulations  that "shared  transport" be made available as an unbundled  network
element.

     On January 25, 1999, the U.S. Supreme Court reversed  important portions of
the  Eighth  Circuit's  holding,  ruling  that the FCC  properly  exercised  its
authority  under the 1996 Act in many  respects.  The  Eighth  Circuit  Court of
Appeals has not yet  reinstated  the FCC rules that the Supreme Court  affirmed.
Several ILECs have asked the Eighth  Circuit not to reinstate  those rules until
it considers  their  argument that the FCC's pricing rules for network  elements
represent an unconstitutional taking of property without just compensation. Even
if the Eighth Circuit recalls its prior mandate,  it remains to be seen how soon
or how vigorously  the FCC will enforce its pricing rules for unbundled  network
elements.

     Certain other aspects of the FCC's  interconnection  orders were vacated by
the Eighth Circuit but were not appealed to the Supreme Court; thus, they remain
vacated.  These  include FCC rules that had  directed  ILECs to combine  network
elements  requested by competitors  whether or not those elements had previously
been  combined,  and a  provision  requiring  ILECs to  provide  interconnection
superior in quality to those provided by the ILECs to themselves, when requested
to do so by  competitors.  A trade  association  representing  competitive  long
distance  carriers has  petitioned  the Eighth  Circuit to interpret the Supreme
Court's  decision  as  implying  that  the  new  combinations   rule  should  be
reinstated, even though it was not directly addressed by the Supreme Court.

     The ultimate  resolution  of local  interconnection  issues  could  enhance
Startec's  flexibility  in  terminating  customer  traffic.  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  Startec.  Further,
certain of the 1996 Act's  provisions have been, and likely will continue to be,
judicially



                                       22
<PAGE>



challenged.  Startec is unable to predict  the  outcome of such  rulemakings  or
litigation or the substantive  effect of the new legislation and the rulemakings
on Startec's business, financial condition and results of operations.

State Regulation

     INTRASTATE  SERVICES  Section  253 of the 1996  Act  prohibits  states  and
localities from adopting or imposing any legal requirement that may prohibit, or
have the  effect of  prohibiting,  the  ability  of any  entity to  provide  any
interstate or intrastate  telecommunications services. The FCC has the authority
to preempt  any such state or local  requirements  to the  extent  necessary  to
enforce  the  open  market  entry  requirements  of the  1996  Act.  States  and
localities  may,  however,  continue to regulate  the  provision  of  intrastate
telecommunications  services,  and,  presumably,   require  carriers  to  obtain
certificates or licenses before providing service.

     Startec  generally  is required to obtain  certification  from the relevant
state PSC prior to the initiation of intrastate service and to file tariffs with
such states. Through its subsidiary,  Startec Global Licensing Company,  Startec
currently is authorized (or certification is not required) to provide service in
40 states and the District of Columbia. Additional applications for approval are
pending in three states.  In some states where Startec already is certified,  it
is  seeking  or  may  seek   modification  of  its   certification   to  provide
facilities-based,  in addition to resale, services. Although Startec 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  Startec'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 Startec'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
Startec's business,  financial  condition and results of operations.  As Startec
expands  its  operations  into  other  states,  it  may  become  subject  to the
jurisdiction of their respective public service commissions for certain services
offered by Startec. Startec monitors regulatory developments in all 50 states to
ensure regulatory compliance.

Foreign Regulation

     EUROPEAN UNION. As Startec has expanded its operations into Europe,  it has
become subject to the regulations  established by various European  governments.
These  regulations,  in turn, are evolving within the context of a European-wide
telecommunications  framework  established by the European Commission ("EC") for
the entire  European  Union  ("EU").  The EU consists of the  following  fifteen
member states: Austria, Belgium, Denmark, Finland, France, Germany, Greece,


                                       23
<PAGE>



Ireland, Italy,  Luxembourg,  the Netherlands,  Portugal,  Spain, Sweden and the
United Kingdom. The expansion by Startec of its business into any EU country may
be directly or indirectly affected by the EC regulatory framework.

     EU member  states are  required to  implement  directives  issued by the EC
authorities (the EU Commission and the Council of the European Union) by passing
national legislation. If an EU member state fails to effect such directives with
national  (or, as the case may be,  regional,  community  or local)  legislation
and/or fails to render the provisions of such  directives  effective  within its
territory,  the EC may take action  against the EU member  state,  including  in
proceedings before the European Court of Justice, to enforce the directives.

     The EC and  Council of the EU have issued a number of key  regulations  and
directives  establishing  basic  principles  for  the  liberalization  of the EU
telecommunications   market.   The  general   framework  for  this   liberalized
environment  has been  set out in the EC's  Services  Directive  (the  "Services
Directive"). The Services Directive sets out principles relating to restrictions
on  the  number  of  licenses  permitted  and  to  procedures,  fees,  essential
requirements  and appeals.  The Services  Directive  directs EU member states to
permit the  competitive  provision of all  telecommunications  services with the
exception of voice telephony  (which does not include  value-added  services and
voice  services  within closed user groups) and certain other services that have
been  gradually  liberalized  through  subsequent  amendments  to  the  Services
Directive.

     The  Full  Competition   Directive,   adopted  in  March  1996  (the  "Full
Competition  Directive"),  amended the Services Directive to set January 1, 1998
as the date by which all EU member  states were required to remove all remaining
restrictions   on   the   provision   of    telecommunications    services   and
telecommunications   infrastructure,    including   voice   telephony.   Certain
derogations  from  compliance  with  this  timetable  have  been  granted.   The
derogations  granted by the EC are as follows:  Luxembourg (July 1, 1998), Spain
(November 30, 1998),  Ireland (January 1, 2000),  Portugal (January 1, 2000) and
Greece (January 1, 2001).

     This  basic  framework  has  been  advanced  by a series  of  harmonization
directives,  which  include  the  so-called  Open  Network  Provision  directive
("ONP"), which established the basic rules for access to the public network, the
Leased Lines Directive,  which required the incumbent carriers to lease lines to
competitors  and end-users and to establish  cost  accounting  systems for those
products by the end of 1993,  the Licensing  Directive of April 1997,  which set
out framework rules for the procedures  associated with the granting of national
authorizations  for the  provision  of  telecommunications  services and for the
establishment  or  operation  of  any   infrastructure   for  the  provision  of
telecommunications  services,  and the  Interconnection  Directive of June 1997,
which  sets  out  the   regulatory   framework   for  securing  in  the  EU  the
interconnection of telecommunications networks.

     A  1998  amendment  to  the   Interconnection   Directive   calls  for  the
introduction of operator number  portability by January 1, 2000 and extended the
requirement  of number  portability  to the entire  fixed  network.  The amended
Directive further requires the introduction of carrier preselection for at least
all fixed network operators by January 1, 2000.



                                       24
<PAGE>



     Each EU member state in which Startec currently conducts its business has a
different  regulatory  regime, and Startec expects such differences to continue.
Accordingly, we must obtain different approvals, where required, from country to
country. As part of the EC commitment, all EU member states are also signatories
to the WTO Agreement.

     AUSTRIA.  Austria joined the EU in January 1995 and,  consequently,  became
subject to the telecommunications  directives of the EC, including the agreement
for total market  liberalization  by January  1998.  In  compliance  with the EU
directives,  in  particular  in response to an  official  EU  directive  warning
Austria of the consequences of delaying  deregulation,  a new telecommunications
law ("TKG 97") was passed by Parliament on August 1, 1997. The TKG 97 introduced
full competition to the Austrian telecommunications market and established a new
independent  regulatory body, the Telekom Control Commission,  to issue licenses
and monitor compliance with telecom regulations.

     Under the TKG 97, an individual  license is required only for the provision
of public voice telephony services,  leased lines offered to the public by means
of a fixed  telecommunications  network,  public mobile  telephony  services and
other mobile communications  provided using a mobile communications network. All
other services,  public or non-public,  may be provided upon notification to the
Telekom Control Commission.  Currently, Internet telephony is not covered by the
legal  provisions for "public voice telephony  service." Any operator or service
provider can offer Internet services.

     Startec  Global  Communications  U.K. Ltd.  ("Startec  UK"), a wholly owned
subsidiary of Startec Global  Communications  Corporation,  was  incorporated on
April 27, 1998.  Startec UK holds  various  telecommunications  licenses  and/or
authorizations  that allow it to offer  services both in the United  Kingdom and
other  European  countries.  In  Austria,  Startec  UK holds a  license  for the
provision of voice  telephone  by  self-operated  telecommunications  network in
Austria.  This license  allows for  interconnection  to Telekom  Austria AG, the
former  monopoly PTT, and for the provision of retail and wholesale  services in
Austria.

     CANADA.  The Canadian market has been  significantly  liberalized  over the
past  year.  As of  October 1, 1998,  international  voice  service,  previously
provided exclusively by Teleglobe, was opened to full competition.  The domestic
long distance  market also has become more  competitive as a result of the break
up of the  Stentor  Alliance,  comprised  of  nine  provincial  incumbent  local
exchange  carriers,  and the  announcement by other companies of their intent to
offer nationwide long distance service.  Additionally,  the Canadian  government
has relaxed long distance  routing  restrictions  so that carriers may now route
domestic and international  traffic according to the most economical route, even
by transiting or hubbing through the United States.  These market and regulatory
changes  will  provide  increased  opportunity  for  competitive  entry  in both
domestic and international  long distance  services  markets.  Section 16 of the
Telecommunications Act restricts Canadian facilities based carriers to a maximum
total of 46.7% of direct and indirect foreign ownership of voting shares.

     Startec Global  Communications  Company (Canada)  ("Startec  Canada"),  was
incorporated  on July 29, 1998.  Startec  Canada has obtained a Class A License,
enabling it to provide  commercial and wholesale  telecommunication  services in
Canada. Startec has also obtained extra-provincial



                                       25
<PAGE>



registrations in Nova Scotia, Ontario,  Manitoba,  Alberta and British Columbia.
Startec currently offers retail prepaid services in British Columbia, Quebec and
Ontario and wholesale carrier services nationwide.

     FRANCE.  In July 1996,  legislation was enacted providing for the immediate
liberalization of all telecommunications activities in France, but maintaining a
partial  exception for the  provision of voice  telephony.  Voice  telephony was
subsequently  fully  liberalized  on  January  1, 1998.  The  establishment  and
operation  of public  telecommunications  networks  and the  provision  of voice
telephony are subject to individual licenses,  which are granted by the minister
in charge of  telecommunications  upon  recommendation  of France's  independent
regulatory authority, the Autorite de Regulation des Telecommunications ("ART").

     Startec  Global  Communications  Corporation  recently  purchased  a  64.6%
ownership  interest in Phone Systems & Network,  S.A. ("PSN"),  a French company
listed on the Nouveau Marche.  (On March 18, 1999, the Company launched a public
tender offer in order to acquire  additional shares of the company.) PSN holds a
Voice Telephony License (Section L34.1 of the French Post and Telecommunications
Code) which allows it to provide deregulated communications services nationwide.
The license also entitles PSN to obtain  interconnect  with the former  monopoly
carrier  France  Telecom,  S.A.  Currently,  PSN provides  prepaid and post-paid
telecommunications services in France, the United Kingdom, Switzerland,  Belgium
and Germany.  France is a key  component of Startec's  European  expansion.  The
acquisition  of PSN  enables  Startec  to  greatly  accelerate  its plans in the
European market.

     GERMANY. The German Telecommunications Act of July 25, 1996 liberalized all
telecommunications  activities,  but postponed effective liberalization of voice
telephony  until  January 1, 1998.  The German  Telecommunications  Act has been
complemented by several  Ordinances.  The most  significant  Ordinances  concern
license fees, rate regulation,  interconnection,  universal service, frequencies
and customer protection.

     Under the German  regulatory  scheme,  licenses can be granted  within four
license classes.  A license is required for operation of transmission lines that
extend   beyond  the  limits  of  a  property  and  that  are  used  to  provide
telecommunications  services for the general public.  The licenses  required for
the  operation  of  transmission  lines are  divided  into three  infrastructure
license classes: mobile telecommunications (license class 1), satellite (license
class 2), and telecommunications  services for the general public (license class
3). In  addition  to the  infrastructure  licenses,  a license is  required  for
operation of voice  telephony  services  over  self-operated  telecommunications
networks  (license  class 4). A class 4 license  does not  include  the right to
operate transmission lines.

     Startec Global  Communications  (Germany) GmbH  ("Startec  Germany"),  is a
wholly owned subsidiary of Startec.  In December 1998, Startec Germany purchased
Global Communications GmbH, a German carrier with Siemens EWSD switch located in
Dusseldorf. Global Communications GmbH holds a Class 4 (Nationwide) license, and
an  interconnection  agreement with Deutsche Telekom which allows the Company to
provide a full range of telecommunication services and to obtain interconnection
with Deutsche Telekom.  An  interconnection  agreement with Deutsche Telekom has
been signed with final physical



                                       26
<PAGE>



interconnect  pending.  Currently also, Startec Germany has installed a POP site
in Frankfurt  which is being  upgraded to a Siemens EWSD switch.  Startec offers
wholesale and retail prepaid services in Germany.

     IRELAND.  Ireland  has  recently  accelerated  the  liberalization  of  its
telecommunications  market,  implementing  full  competition  a  year  ahead  of
schedule. On December 1, 1998 Ireland granted 29 new telecommunications licenses
of which 21 were general licenses for public voice telephony.  The Office of the
Director   of   Telecommunications    Regulation   (ODTR),    created   by   the
Telecommunications  (Miscellaneous  Provisions) Act of 1996 is currently working
on a broad range of regulatory initiatives to bring Ireland up to par with other
European countries with more advanced liberalization regimes.

     In Ireland, Startec U.K. holds a General Telecommunications  License, which
allows  Startec to offer  retail and  wholesale  telecommunication  services  in
Ireland and to interconnect to Telecom Eireann.

     THE NETHERLANDS.  The Dutch  Telecommunications Act of 1998 ("Dutch Telecom
Act"), which became effective December 15, 1998, provides the current regulatory
framework for the provision of  telecommunications  services in the Netherlands.
The new regime closely parallels the EU Licensing Directive requiring individual
licenses  only  for  the use of  spectrum.  All  other  services  including  the
installation and provision of public  telecommunications  networks, leased lines
and broadcasting  networks may be provided  pursuant to registration.  The newly
enacted   Dutch   Telecom   Act   also    facilitates   the    construction   of
telecommunications   networks   by   giving   registered   carriers   access  to
rights-of-way, subject to certain conditions.

     In the  Netherlands,  Startec holds a Special Network Access  Registration,
which allows for retail and wholesale  services and  interconnection  with Royal
KPN  Netherlands,  N.V.  Startec  has  installed a POP in the  Netherlands,  and
currently  offers carrier  wholesale and prepaid retail services to customers in
the Netherlands.

     NEW ZEALAND.  The New Zealand market is fully liberalized.  In New Zealand,
Startec UK holds a  registration  as an  operator  under the  Telecommunications
(International  Services)  Regulations  1994.  Startec  has  not  yet  commenced
services in New Zealand.

     SWITZERLAND.  Switzerland  is not a member  of the EU.  Nonetheless,  a new
Telecommunications  Act was  adopted by the Swiss  Parliament  in April 1997 and
took  effect on  January 1,  1998,  together  with  Ordinances  containing  more
detailed regulations covering telecommunications services, frequency management,
numbering,  terminal equipment and license fees. The new  Telecommunications Act
liberalized the Swiss telecommunications market as of January 1, 1998.

     The newly enacted Swiss telecommunications regulatory framework facilitates
market  entry by: (1)  applying a  notification  procedure  for  resellers;  (2)
applying a procedure  for operators  wishing to be granted a concession  for the
establishment  and  operation  of  transmission  facilities;  and (3)  providing
rights-of-way,  subject to a procedure of authorization,  over the public domain
to facilities-based  carriers.  Pro-competitive regulation is also applicable in
the area of numbering.


                                       27
<PAGE>



     Startec Global Communications (Switzerland) GmbH ("Startec Switzerland"), a
wholly owned subsidiary of Startec,  was incorporated on August 5, 1998. Startec
Switzerland holds a Registration for the Supply of  Telecommunications  Services
in Switzerland,  which allows for interconnection  with Swisscom S.A. as well as
for the  provision of wholesale and retail  services.  Startec  Switzerland  has
installed  a POP site in Geneva  through  which  retail  prepaid  and  wholesale
carrier services are provided in Switzerland.

     THE  UNITED  KINGDOM.  The  Telecommunications  Act 1984 (the  "U.K.  Act")
provides a licensing and regulatory framework for telecommunications  activities
in the United Kingdom,  which are fully competitive.  The Secretary of State for
Trade and Industry at the  Department of Trade and Industry  (the  "Secretary of
Trade")  is  responsible  for  granting  licenses  under  the  U.K.  Act and for
overseeing   telecommunications   policy,   while  the   Director   General   of
Telecommunications  (the  "Director  General")  and his office are  responsible,
among other  things,  for  enforcing  the terms of such  licenses.  The Director
General will  recommend  the grant of a license to operate a  telecommunications
network to any  applicant  that the Director  General  believes has a reasonable
business  plan, the necessary  financial  resources and where there are no other
overriding  considerations against the grant of a license. In December 1996, the
British Government introduced the International Facilities License ("IFL") which
authorizes  holders to provide  international  telecommunications  services over
their own international  infrastructure and/or by making use of IRUs in undersea
cables.

     Startec U.K. holds an IFL which enables  Startec to own  telecommunications
facilities  entering the U.K. and gives Startec UK the rights and obligations to
interconnect  with British  Telecom  Communications  at  wholesale  interconnect
rates.  Startec Global  Communications  Corporation  also holds an International
Simple Voice Resale ("ISVR")  license in the U.K. Startec UK has a POP in London
and is in the process of upgrading to a Siemens EWSD switch. Currently,  Startec
UK offers wholesale carrier and retail prepaid services in the U.K.



                                       28

<PAGE>


EMPLOYEES

     As of December 31, 1998,  the Company had 338  full-time  employees  and 71
part-time employees.  The Company's employees are not currently represented by a
collective bargaining agreement. The Company believes that it has good relations
with its employees.

ITEM 2. PROPERTIES

     The following table sets forth certain information as of December 31, 1998,
relating to facilities used by the Company. All of the properties are leased.

<TABLE>
<CAPTION>
                                              SQUARE                                                       DATE PLACED
                                              FOOTAGE                                                      IN SERVICE
                                           --------------                                                 --------------
    LEASED OFFICE SPACE                                        CALL CENTERS
    -------------------                                        ------------
<S>                                           <C>                   <C>                                       <C>
         Bethesda, MD (1)                     49,500                Bethesda, MD                              1991
         Bethesda, MD                         43,700                Guam, United States                       1996
         Los Angeles, CA (2)                   7,300
         Los Angeles, CA                       4,300           
         Guam, United States                   8,000           
         London, UK                              520            
         Frankfurt, Germany                    9,000
         Miami, Fl (2)                        10,000
         New York, NY (2)                      2,100
         Saipan                                1,000

</TABLE>
    ------------------------------------

(1)      Headquarters of Startec Global Communications Corporation.
(2)      Facilities that house the switches

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

         None.

                                     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 listed on the NASDAQ National Market under the ticker
symbol  "STGC".  The Company has not declared  any cash  dividends on the common
stock.  The Company  intends to retain future  earnings,  if any, for use in its
business and does not  anticipate  paying  regular cash  dividends on the common
stock.




                                       29
<PAGE>


         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 two fiscal years ended December 31,
1998. Such prices reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and do not necessarily represent actual transactions.

                                                         HIGH           LOW
                                                     ------------  -------------
              1997
                 4th Quarter (from 10/8/97)..........   22 3/8         14 1/2

              1998

                 1st Quarter.........................   26 3/4           18
                 2nd Quarter.........................   29 1/8        8 11/16
                 3rd Quarter.........................   14 1/2         5 1/2
                 4th Quarter.........................   12 1/2         3 3/8

              1999

                 1st Quarter (through 3/19/99).......10 7/16          7 5/8

As of March 19, 1999, there were  approximately 42 stockholders of record of the
Company's common stock.




                                       30
<PAGE>





ITEM 6. SELECTED FINANCIAL DATA

     The following  table  presents  selected  historical  financial data of the
Company which have been derived from the Company's audited financial  statements
for  the  five  most  recent  years  ended  December  31,  1998.  The  following
information  should be read in conjunction with the Company's selected financial
statements  and notes thereto  presented  elsewhere  herein.  See  "Consolidated
Financial  Statements"  and  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations." included herein.

<TABLE>
<CAPTION>
                                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                              -------------------------------------------------------------
               STATEMENT OF OPERATIONS DATA:                     1998         1997         1996         1995         1994
                                                              ---------    ---------    ---------    ---------    ---------
<S>                                                           <C>          <C>          <C>          <C>          <C>
Net revenues ................................................ $ 161,169    $  85,857    $  32,215    $  10,508    $   5,108
Cost of services.............................................   141,176       75,783       29,881        9,129        4,701
                                                              ---------    ---------    ---------    ---------    ---------
  Gross margin...............................................    19,993       10,074        2,334        1,379          407
General and administrative...................................    20,520        6,288        3,996        2,170        1,159
Selling and marketing expenses...............................     7,876        1,238          514          184           91
Depreciation and amortization................................     2,253          451          333          137           90
                                                              ---------    ---------    ---------    ---------    ---------

  Income (loss) from operations .............................   (10,656)       2,097       (2,509)      (1,112)        (933)
Interest income (expense), net...............................    (7,404)        (449)        (321)         (94)         (46)
                                                              ---------    ---------    ---------    ---------    ---------

  Income (loss) before taxes and extraordinary items.........   (18,060)       1,648       (2,830)      (1,206)        (979)
                                                              ---------    ---------    ---------    ---------    ---------

  Net income (loss)(1) ...................................... $ (18,574)   $   1,619    $  (2,830)   $  (1,206)   $    (979)
                                                              =========    =========    =========    =========    =========
Basic earnings (loss) per common share(2):
  Income (loss) before extraordinary items .................. $   (2.02)   $    0.26     $  (0.52)   $   (0.23)   $   (0.21)
  Net income (loss)(1).......................................     (2.08)        0.26        (0.52)       (0.23)       (0.21)
  Weighted average common shares outstanding-basic...........     8,945        6,136        5,403        5,317        4,596

Diluted earnings (loss) per common share(2):
  Income (loss) before extraordinary items .................. $   (2.02)   $    0.25    $   (0.52)   $   (0.23)   $   (0.21)
  Net income (loss)(1).......................................     (2.08)        0.25        (0.52)       (0.23)       (0.21)
  Weighted average common and equivalent shares
       outstanding-diluted...................................     8,945        6,423        5,403        5,317        4,596

                   OTHER FINANCIAL DATA:
EBITDA(3) ................................................... $  (8,403)   $   2,548    $  (2,176)   $    (975)   $    (843)
Capital expenditures ........................................    34,931        3,881          520          200           44

                    BALANCE SHEET DATA:
Cash and cash equivalents ................................... $  81,456    $  26,114    $     148    $     528    $     257
Working capital (deficit)....................................    81,414       25,735       (6,999)      (3,744)      (3,295)
Total assets.................................................   225,982       51,530        7,327        4,044        1,954
Long term obligations........................................   165,490          461          646          361            6
Total stockholders' equity (deficit).........................    15,480       31,590       (6,089)      (3,259)      (2,803)

</TABLE>

----------

(1)  In 1998, the Company recognized a $514,000  extraordinary loss on the early
     extinguishment of debt.

(2)  Basic  earnings  (loss) per common share is computed by dividing net income
     (loss)  by  the  weighted   average   number  of  shares  of  common  stock
     outstanding.  Diluted  earnings  (loss) per  common  share is  computed  by
     dividing  net income  (loss) by the  weighted  average  number of shares of
     common stock outstanding plus other dilutive securities.

(3)  EBITDA  consists  of  earnings  (loss)  before   interest,   income  taxes,
     depreciation  and  amortization.  EBITDA  should  not  be  considered  as a
     substitute for income from operations (loss), net income (loss),  cash flow
     or other  statement of income or cash flow data computed in accordance with
     GAAP or as a measure of a company's  results of  operations  or  liquidity.
     Although EBITDA is not a measure of performance or liquidity  calculated in
     accordance  with GAAP,  the Company  nevertheless  believes that  investors
     consider it a useful measure in assessing a company's  ability to incur and
     service indebtedness.




                                       31
<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. Certain  information  contained below and elsewhere in this Form
10-K, including  information  regarding the Company's plans and strategy for its
business, are forward-looking  statements.  See "Note Regarding  Forward-Looking
Statements."

OVERVIEW

     Startec  Global  Communications,  Inc.  ("Startec"  or the  "Company") is a
rapidly growing, facilities based international long distance telecommunications
service provider.  The Company markets its services to select ethnic residential
communities  in the United States and Europe and to leading  international  long
distance  carriers.  The  Company's  annual  revenues have  increased  more than
fourteen-fold over the last four years from approximately  $10.5 million for the
year ended December 31, 1995 to approximately  $161.2 million for the year ended
December 31, 1998.  The Company  reported a 1998 net loss of $18.6  million,  or
$2.08 per diluted common share compared to net income of $1.6 million,  or $0.25
per  diluted  common  share in 1997.  The  number of the  Company's  residential
customers  increased  from 10,675  customers  as of December 31, 1995 to 122,057
customers as of December 31, 1998.

     Startec  was  founded in 1989 to  capitalize  on  opportunities  to provide
international  long distance services to select ethnic communities in major U.S.
metropolitan  markets that generate  substantial  long distance traffic to their
countries of origin.  Until 1995, the Company concentrated its marketing efforts
in the New  York-Washington,  D.C.  corridor  and  focused  on the  delivery  of
international  calling  services  to  India.  At the end of  1995,  the  Company
expanded its marketing  efforts to include the West Coast of the United  States,
and began targeting other ethnic groups in the United States, such as the Middle
Eastern,  Filipino and Russian communities.  The Company once again expanded its
marketing  efforts  geographically  at the end of 1998 by  marketing  to  ethnic
segments  in the United  Kingdom and  diversifying  its  customer  base across a
broader spectrum of ethnic groups,  including the Caribbean,  Latin American and
Asian communities.

     In order to  achieve  economies  of scale  in its  network  operations  and
balance its residential  international traffic, the Company, in late 1995, began
marketing  its  excess  network  capacity  to  international   carriers  seeking
competitive rates and high quality capacity.  Since initiating its international
wholesale services,  the Company has expanded its number of carrier customers to
53 at December 31, 1998.

     A key  component  of the  Company's  strategy  is to build  its own  global
network, which will allow it to originate,  transmit and terminate a substantial
portion  of its calls  utilizing  network  capacity  the  Company  manages.  The
facilities  currently  owned by the Company only provide a cost  advantage  with
respect to traffic  origination costs. The Company anticipates that this network
expansion will allow it to achieve a per-minute cost  advantage.  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 Company realizes a per-minute cost savings
when it is able to originate calls on-net.  For the year ended December 31, 1998
and 1997, approximately 65% and 60%, 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 those 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 PTTs, as described
below,  are  recognized  as  revenue  as the  return  traffic  is  received  and
processed. There can be no assurance that traffic will be returned to the United
States or what impact  changes in future  settlement  rates,  allocations  among
carriers or levels of traffic  will have on net  payments  received and revenues
recorded by the Company.





                                       32
<PAGE>

     Substantially all of the Company's revenues for the past three fiscal years
have been derived from calls originated  within the United States and terminated
outside the United  States.  The  percentages  of net revenues  attributable  to
traffic  terminating  on a  region-by-region  basis  are set  forth in the table
below.
  
                                         For the year ended December 31,
                                     1998            1997             1996
                                 -------------    ------------    -------------
  
   Asia/The Pacific Rim                  44.8 %          49.0 %           43.0 %
   Middle East/North Africa              18.8            24.7             25.7
   Sub-Saharan Africa                     8.1             7.4              3.5
   Eastern Europe                         9.6             9.3              8.2
   Western Europe                         1.7             2.2              5.5
   North America                          3.5             4.0             11.5
   Other                                 13.5             3.4              2.6
                                 -------------    ------------    -------------
  
        Total                           100.0 %         100.0 %          100.0 %
                                 =============    ============    =============

<PAGE>


     The Company's cost of services  consists of origination,  transmission  and
termination  expenses.  Origination costs include the amounts paid to LECs, and,
in areas where the Company  does not have its own network  facilities,  to other
telecommunication  network providers for originating calls ultimately carried to
the Company's switches.  Transmission expenses are fixed month-to-month payments
associated with capacity on domestic and international leased lines,  satellites
and undersea fiber optic cables.  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  own network.  As the
Company builds its own  transmission  capacity,  the risks associated with price
fluctuations  and the relative costs of  transmission  are expected to decrease;
however,  fixed costs will increase.  When billing  disputes between the Company
and other  telecommunication  network  providers  arise, the Company accrues the
full amount in dispute  within cost of services and does not  recognize a credit
to cost of services until the dispute is resolved.  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.  Accordingly,  adjustments to the Company's cost of services arising
from the  resolution of billing  disputes with other  telecommunication  network
providers may have a positive impact on gross margins in any particular year.

     Termination expenses consist of variable per minute charges paid to foreign
PTTs  and  alternative   carriers  to  terminate  the  Company's   international
long-distance traffic. 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 to the
United States is routed through  U.S.-based  international  carriers such as the
Company in the same  proportion as traffic carried into the foreign country from
the United States ("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  margin on the return  traffic as compared to the lower
gross margin on the outbound traffic. Revenue recognized from return traffic was
approximately $2.6 million, $1.4 million, and $1.1 million, or 2%, 2%, and 3% of
net revenues in 1998, 1997, 1996,  respectively.  There can be no assurance that
traffic  will be delivered  back to the United  States or that changes in future
settlement  rates,  allocations  among  carriers  or levels of traffic  will not
adversely affect net payments received and revenues recorded by the Company.

     In addition to  operating  agreements,  the  Company  utilizes  alternative
termination  arrangements  offered by third party vendors.  The Company seeks to
maintain  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 price reductions,  although there can be no assurance that
this will continue.  The Company  expects  selling,  general and  administrative
costs to increase as it develops its  infrastructure  to manage higher  business
volume.

     The Company  expects to incur  negative  EBITDA and  significant  operating
losses and net losses on an annual basis for the next several years as it incurs
additional  costs  associated with the development and expansion of its network,
the  expansion  of its  marketing  programs,  its entry into new markets and the
introduction of new telecommunications services, and, in the case of net losses,
as a result of the interest expense associated with its financing activities.



                                       33
<PAGE>



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,
                                                                     -----------------------------------------
                                                                        1998             1997          1996
                                                                     ------------    ------------   -----------
<S>                                                                        <C>             <C>           <C>    
              Net revenues......................................           100.0 %         100.0 %       100.0 %
              Cost of services..................................            87.6            88.3          92.8
                                                                     ------------    ------------   -----------

                 Gross margin..................................             12.4            11.7           7.2
              General and administrative expenses...............            12.7             7.3          12.4
              Depreciation and amortization.....................             1.4             0.5           1.0
                                                                     ------------    ------------   -----------

                 Income (loss) from operations...................           (6.6)            2.5          (7.8)
              Interest expense...................................           (8.0)           (0.9)         (1.1)
              Interest income....................................            3.4             0.3           0.1
                                                                     ------------    ------------   -----------

                 Income (loss) before taxes and extraordinary item         (11.2)%           1.9%         (8.8)%
                                                                     =============   ============   =============

</TABLE>


     1998 compared to 1997

     Net Revenues.  Net revenues for the year ended  December 31, 1998 increased
approximately $75.3 million, or 88%, to approximately  $161.2 million from $85.9
million for the year ended December 31, 1997.  Residential  revenue increased in
comparative  periods by  approximately  $25.1  million or 88%, to  approximately
$53.7 million for 1998 from approximately $28.6 million in 1997. The increase in
residential  revenue is due to an  increase  in  residential  customers  to over
122,057 for December 1998 from  approximately  71,500 for December 1997. Carrier
revenue for 1998 increased approximately $50.2 million, or 88%, to approximately
$107.5  million  from  approximately  $57.3  million for 1997.  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  $9.9  million  to
approximately   $20  million  for  the  year  ended   December   31,  1998  from
approximately  $10.1 million for the year ended December 31, 1997.  Gross margin
improved as a percentage of net revenues for the year ended December 31, 1998 to
12.4% from 11.7% for the year ended December 31, 1997. Gross margin for 1998 was
favorably  impacted by rate adjustments which reduce  termination  costs.  These
rate adjustments occur routinely in the normal course of business.

     General and  Administrative.  General and  administrative  expenses for the
year ended  December 31, 1998 increased  approximately  $14.2 million or 225% to
approximately  $20.5  million from $6.3 million for the year ended  December 31,
1997.  The  increase  was  primarily  due to an increase in  personnel to 409 at
December  31, 1998 from 124 at December  31, 1997,  and to a lesser  extent,  an
increase in billing  processing  fees as a result of the  increased  residential
customer  base.  As a percentage  of net  revenues,  general and  administrative
expenses  increased  to 12.7%  in 1998  from  7.3% in 1997 due to the  Company's
continued worldwide development and expansion.

     Selling and  Marketing.  Selling and marketing  expenses for the year ended
December 31, 1998 increased  approximately $6.7 million or 558% to approximately
$7.9 million  from  approximately  $1.2 million for the year ended  December 31,
1997. As a percentage of net revenues,  selling and marketing expenses increased
to 4.9% from 1.4% in the  respective  periods.  The increase 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, 1998 increased to  approximately  $2.3 million from
approximately  $451,000 for the year ended  December 31, 1997,  primarily due to
increases  in  capital  expenditures  pursuant  to  the  Company's  strategy  of
expanding its network infrastructure.

     Interest  expense.  Interest  expense for the year ended  December 31, 1998
increased to  approximately  $12.8 million from  approximately  $762,000 for the
year ended  December  31,  1997,  as a result of the Senior  Notes and  Warrants
Offering  consummated  in 1998,  the  proceeds  of which are being  used to fund
expansion and working capital needs.

     Interest  income.  Interest  income for 1998 increased to $5.4 million from
$313,000 in 1997.  The  increase is primarily  due to the net proceeds  from the
Senior Notes and Warrants Offering consummated in 1998.

     Income (loss) before extraordinary item. Loss before extraordinary item for
1998 was $18.1  million  compared to income  before  extraordinary  item of $1.6
million in 1997 as a result of the items discussed above.

     Extraordinary  loss. In December 1998, the Company repaid and  extinguished
an existing bank credit  facility.  In connection with the  extinguishment,  the
Company  recognized an  extraordinary  loss of $514,000,  which  represents  the
write-off of unamortized


                                       34
<PAGE>


deferred financing fees.

         Net Income (loss). Net loss was approximately  $18.6 million in 1998 as
compared to net income of approximately $1.6 million in 1997.

     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 was due to an increase in
residential  customers  to over 71,500 at December  31, 1997 from  approximately
27,800 at December 31,  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  was due to the  execution  of the  Company's
strategy to  optimize  capacity on its  facilities,  which  resulted in sales to
additional carrier customers and increased sales to existing carrier customers.

     Gross  Margin.  Gross  margin  increased   approximately  $7.8  million  to
approximately   $10.1  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 years  ended  December  31,  1997 and
December  31,  1996  included  the  effect  of  accrued   disputed   charges  of
approximately  $67,000 and $1.4 million,  respectively,  which  represented less
than 1% and 5% of reported net revenues, respectively.

     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 124 at December 31,
1997 from 54 at  December  31,  1996,  and to a lesser  extent,  an  increase in
billing processing fees as a result of the increased residential customer base.

     Selling and  marketing.  Selling and marketing  expenses for the year ended
December 31, 1997 increased  approximately  $686,000 or 133.5% 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  was
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  expense.  Interest  expense for the year ended  December 31, 1997
increased to  approximately  $762,000 from $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.

LIQUIDITY AND CAPITAL RESOURCES

     For fiscal  year 1998,  the  Company  reported an increase in cash and cash
equivalents  of  $55.3  million  not  including   restricted  cash  and  pledged
securities of $44.2 million. This increase is primarily due to net proceeds from
the issuance of senior notes ("Senior Notes") of $155 million. The Company plans
to fund its future capital and operating  requirements  through a combination of
operating cash flow, and debt and equity financing. The Company plans to utilize
these sources of capital to further  expand and develop the  Company's  existing
network and fund capital acquisitions.




                                       35
<PAGE>



     As a result of  completing  the Senior Notes and Warrants  Offering and the
Company's  pursuant  expansion,  the Company expects that it will incur negative
EBITDA and  significant  operating  losses and net losses on an annual basis for
the next  several  years,  as it incurs  additional  costs  associated  with the
development  and  expansion  of its  marketing  programs  and its entry into new
markets, the introduction of new telecommunications services, and as a result of
the interest  expense  associated with its financing  activities.  The Company's
principal  cash  requirements  will be for capital  expenditures  related to the
Company's  network  development  plan,  and for interest  payments on the Senior
Notes.  Approximately  $52 million of the net  proceeds of the Senior  Notes was
used to purchase the pledged securities, which will assure holders of the Senior
Notes that they will  receive  all  scheduled  cash  interest  payments  through
November  2001.  The Company may be required to obtain  additional  financing in
order to pay interest in the Senior Notes after  November  2001 and to repay the
Senior Notes at their maturity.

     Capital acquisitions and expenditures

     During 1998, the Company installed a new Nortel GSP  international  gateway
switch and an Internet Protocol in Los Angeles for  approximately  $4.6 million.
The Company is also  installing  a Nortel GSP  international  gateway  switch in
Miami,  as well as at a  second  site in New York  City.  The  Company  has also
installed POPs in the U.S. and Europe.  The POPs aggregate  traffic  originating
from the region  around the city in which it is located and route the traffic to
the   Company's    international    gateway   switches.    Each   POP   contains
telecommunications equipment that is scaleable to accommodate the traffic volume
demands of each region. The Company currently has 15 switch and POP sites in the
U.S., Europe and Asia.  Moreover,  the Company plans to invest in or acquire two
satellite earth stations during 1999.

     The  Company's  international  expansion  strategy  is  predicated  on  the
installation  of multiple  switches and POPs  throughout the world.  The Company
plans to acquire multiple  international  gateway switches and POPs through 2000
to be installed in (i) Europe: the U.K., France, Germany, Spain, Belgium, Italy,
Austria, Denmark, Ireland, Switzerland, Greece and Portugal; (ii) North America:
the U.S., Canada,  and Mexico;  (iii) Asia and the Pacific Rim: Guam, Hong Kong,
Singapore  and India;  and (iv) Latin and South  America:  Argentina and Brazil.
These  switches will be deployed in 1999 and 2000.  As the Company  executes its
expansion  strategy,  encounters  new  marketing  opportunities  and employs new
technology,  management may elect to relocate or redeploy certain switches, POPs
and other network equipment to alternate locations from what is described above.

     The  Company  generally  installs  switches  and POPs in  regions  where it
believes it can achieve one or more of the following  goals: (i) originate calls
from its own customer  base,  (ii)  transit  calls  originated  elsewhere on its
network to the call's final destination on a more cost-efficient basis, or (iii)
terminate calls  originated and carried on its own network.  The Company intends
to use the switches  and POPs to be installed in Canada and Europe  primarily to
carry calls  originated  in those  countries  by the  Company's  customers.  The
switches and POPs that the Company  plans to install in Asia and the Pacific Rim
and in Latin and South  America will be used both as "hubbing" or transit  sites
and to terminate calls originated in other countries.

     Also during 1998,  Startec  negotiated  the  acquisition  of capacity on 11
fiber optic cable systems  across the Atlantic and Pacific  oceans.  Startec now
has  capacity  on  13  cable  systems,  including  signatory  ownership  in  the
Sea-Me-We-3  undersea  fiber optic  cable.  Startec  also signed an agreement to
purchase  capacity in the Trans Atlantic undersea cable,  TAT-14.  Additionally,
the Company  purchased DS-3 capacity on the Gemini  transatlantic  cable between
New York and the United Kingdom.  Through these cables, Startec will have access
to key cities in Europe and Asia.  Securing ownership interests at the signatory
level in undersea  fiber optic cable  allows the Company to manage  transmission
capacity  as well as  transmission  costs.  In  addition  to the cable  capacity
acquisitions,  Startec  has  secured 40  operating  agreements  in 36  different
countries as of December 31, 1998.  Twenty-three of these  operating  agreements
have been implemented as of December 31, 1998.

     In November 1998, the Company acquired PCI Communications, Inc. ("PCI") for
$2.65  million.  PCI is a  provider  of voice and data  services  located in the
Pacific  Rim  island  of  Guam.   PCI  has   signatory   status  on  the  TPC-5,
Guam-Philippines  and  China-U.S.   cables.  The  acquisition   accelerates  the
Company's  network  deployment  in the  Asia-Pacific  region and will also allow
Startec  to  access a U.S.  based  satellite  line of sight  that  extends  from
Southeast Asia to Central Europe.

     In  December  1998,  the Company  acquired  Global  Communications  GmbH of
Germany  ("Global")  for  $5.4  million.   Global  has  a  Class  IV  nationwide
telecommunications  license  for  Germany,  an  interconnection  agreement  with
Deutsche Telekom and a Siemens EWSD switch located in Dusseldorf.

     In February 1999, the Company  acquired a 64.6%  ownership in Phone Systems
and Network Inc. of France  ("PSN") for  approximately  $3.8 million in cash and
425,000  shares  of  Startec  common  stock  for a total  consideration  of $7.6
million.  PSN is a facilities  based provider in France,  with switches in Paris
and Switzerland.  PSN also provides  services on a switchless  reseller basis in
Belgium.  Common  shares of PSN are traded on the  Nouveau  Marche  exchange  in
France.




                                       36
<PAGE>



     In February 1999, the Company  acquired a 20% ownership in a Nevada holding
company  which  has   operations  in  Europe.   The  Company  was  acquired  for
approximately $1.2 million. Concurrent with the acquisition,  Startec received a
$2.5 million note payable from the company  convertible at the Company's  option
into common shares equivalent to an additional 28% fully diluted ownership.

     The Company's business strategy contemplates aggregate capital expenditures
(including  capital  expenditures,  working capital and other general  corporate
purposes) of  approximately  $87.5  million  through  December 31, 1999. Of such
amount,  the Company intends to use approximately  $79.5 million to fund capital
expenditures to expand and develop the Company's network.

     The  Company  regularly  reviews  opportunities  to  further  its  business
strategy  through  strategic  alliances with,  investment in, or acquisitions of
businesses  that it believes  are  complementary  to the  Company's  current and
planned operations.  The Company's ability to consummate strategic alliances and
acquisitions,  and to make investments that may be of strategic  significance to
the Company,  may require the Company to obtain  additional  debt and/or  equity
financing.  There can be no  assurance  that the Company will be  successful  in
arranging such financing on terms it considers acceptable or at all.

     Although  the  Company  intends to  implement  the  capital  spending  plan
described above, it is possible that  unanticipated  business  opportunities may
arise which the  Company's  management  may conclude  are more  favorable to the
long-term  prospects  of the  Company  than those  contemplated  by the  current
capital spending plan.

     Capital transactions

     In December  1998,  Startec  entered  into a credit  facility for up to $35
million with NTFC Capital  Corporation ("NTFC Facility"),  a financing arm of GE
Capital.  The line of credit is  flexible  and may be used to finance  switches,
associated  telecommunications  equipment,  undersea fiber optic cables, and the
expansion  of  facilities  in  the  Company's  targeted  marketing  areas.  Each
borrowing  under the NTFC Facility  bears  interest at a fixed rate equal to the
average  yield  to  maturity  of the  five-year  Treasury  Note  plus  the  Rate
Adjustment (as defined in the agreement).  Individual  borrowings under the NTFC
Facility  are  amortized  over 60 months  from the date of advance  with a final
maturity of all  outstanding  amounts of January  2004. As of December 31, 1998,
approximately $8.9 million bearing interest at 8.91% was outstanding.  Principal
and interest payments of approximately $184,000 are due monthly in arrears.

     In May 1998,  the Company  issued $160 million of 12% Senior Notes yielding
net proceeds of approximately $155 million, of which approximately $52.4 million
was used to purchase  securities which are pledged and restricted for use as the
first six interest  payments due on the Senior  Notes.  As part of the offering,
the Company  issued  warrants to purchase  200,226  shares of common stock.  The
warrants are  exercisable  subsequent to November  1998 at an exercise  price of
$24.20 per share.  The Company  intends to apply  approximately  $102 million to
fund capital expenditures through the end of the first quarter of 2000 to expand
and develop the Company's  network,  including the purchase and  installation of
switches and related network equipment (including software and hardware upgrades
for current  equipment),  the acquisition of fiber optic cable  facilities,  and
investments in and the acquisition of satellite earth stations. The Senior Notes
are unsecured and require  semi-annual  interest  payments  which began November
1998.

     After  taking into  account the net proceeds to the Company from the Senior
Notes and the purchase of the pledged  securities  together  with the  Company's
cash on hand and anticipated cash from  operations,  the Company expects that it
will need  approximately  $40 million of  additional  financing  to complete its
capital  spending  plan through the end of 2000.  Although the Company  believes
that it  should be able to  obtain  this  required  financing  from  traditional
sources,  such as bank lenders,  asset-based  financiers  or equipment  vendors,
there can be no assurance  the Company  will be  successful  in  arranging  such
financing  on terms it  considers  acceptable  or at all.  In the event that the
Company is unable to obtain additional  financing,  it will be required to limit
or curtail its expansion plans.

     The  implementation  of  the  Company's   strategic  plan,   including  the
development and expansion of its network facilities,  expansion of its marketing
programs,  and funding of  operating  losses and  working  capital  needs,  will
require significant investment. The Company expects that the net proceeds of the
Senior Notes and Warrants Offering together with cash on hand and cash flow from
operations,  will provide the Company with sufficient  capital to fund currently
planned capital expenditures and anticipated operating losses through the end of
the first quarter 2000. There can be no assurance that the Company will not need
additional financing sooner than currently anticipated.  The need for additional
financing depends on a variety of factors,  including the rate and extent of the
Company's  expansion  and new markets,  the cost of an  investment in additional
switching and transmission facilities and ownership rights in fiber optic cable,
the  incurrence of costs to support the  introduction  of additional or enhanced
services,  and increased sales and marketing expenses. In addition,  the Company
may need additional financing to fund unanticipated  working capital needs or to
take advantage of unanticipated business opportunities,  including acquisitions,
investments or strategic  alliances.  The amount of the Company's  actual future
capital  requirements also will depend upon many factors that are not within the
Company's  control,  including  competitive  conditions  and regulatory or other
government  actions. In the event that the Company's plans or assumptions 




                                       37
<PAGE>


change or prove to be inaccurate or the Company's  capital resources prove to be
insufficient to fund the Company's  growth and  operations,  then some or all of
the Company's development and expansion plans could be delayed or abandoned,  or
the Company may be required to seek additional  financing or to sell assets,  to
the extent permitted by the terms of the Senior Notes.

     The Company completed an Initial Public Offering of 3,277,500 shares of its
common stock ("Common Stock") in October 1997 ("Initial Public  Offering"),  the
net  proceeds of which  (after  underwriting  discounts,  commissions  and other
professional fees) approximated $35.0 million. The Company used a portion of the
net proceeds to acquire cable facilities and switching,  compression and related
telecommunications equipment. Proceeds were also used for marketing programs, to
pay down debt, for working capital and general corporate purposes.

     The  Company  may seek to raise  such  additional  capital  from  public or
private equity or debt sources.  There can be no assurance that the Company will
be able to obtain additional financing or, if obtained,  that it will be able to
do so on a timely basis or on terms favorable to the Company.  If the Company is
able to raise  additional  funds through the incurrence of debt, it would likely
become subject to additional restrictive financial covenants.  In the event that
the Company is unable to obtain such  additional  capital or is unable to obtain
such  additional  capital on  acceptable  terms,  the Company may be required to
reduce the scope of its expansion,  which could  adversely  affect the Company's
business,  financial condition and results of operations, its ability to compete
and its ability to meet its obligations under the Senior Notes.

     Cash flows

     The  Company's  liquidity  requirements  arise from cash used in  operating
activities,   purchases  of  network   equipment  and  payments  on  outstanding
indebtedness.

     As a result of the Senior Notes and Warrants  Offering,  the Company's cash
and cash equivalents  increased to  approximately  $81.4 million at December 31,
1998 from  approximately  $26.1  million at December 31, 1997.  Net cash used by
operating  activities was approximately $25.5 million for 1998, and $1.7 million
for 1997.  The decrease in cash from  operations was primarily the result of the
net loss and an increase in accounts  receivable,  which was partially offset by
an increase in accounts payable and accrued expenses.

     Net cash used in investing  activities was approximately  $37.6 million and
$3.9  million  for 1998 and  1997,  respectively.  Net  cash  used in  investing
activities  for  1998  was  primarily   related  to  acquisitions   and  capital
expenditures made in connection with its network expansion.

     Net cash provided by financing  activities was approximately $118.4 million
and $31.6  million for 1998 and 1997,  respectively.  Cash provided by financing
activities  for 1998  primarily  resulted  from the  Senior  Notes and  Warrants
Offering.

     Year 2000 compliance

     Many of the world's  computer systems  (including those in  non-information
technology  equipment and systems) currently record years in a two-digit format.
If not  addressed,  such computer  systems will be unable to properly  interpret
dates beyond the year 1999, which could lead to business disruptions in the U.S.
and  internationally  (the "Y2K" issue).  A number of the  Company's  technology
systems are  affected by the Y2K issue.  To ensure that the Company  will be Y2K
compliant before the new millenium,  the Company formed a Y2K compliance team in
the fourth  quarter of 1997 and allocated  corporate  resources to determine the
extent  which  the  Y2K  issue  affected  the  Company  and to  formulate  a Y2K
compliance  plan.  Since  then,  the  Company has been  reviewing  its  embedded
technology and  infrastructure  equipment,  as well as  non-embedded  technology
equipment to identify  those that contain  two-digit  year codes,  and is in the
process of upgrading its infrastructure and corporate  facilities to achieve Y2K
compliance.  In addition,  the Company is actively  working with its  suppliers,
vendors and customers to assess their compliance and remediation efforts and the
Company's  exposure  to Y2K  problems  that may be caused by the failure of such
suppliers, vendors and customers to become Y2K compliant in a timely manner. The
Company is  proceeding  on a schedule  which it believes will allow it to be Y2K
compliant by the end of the third quarter of 1999.

     The  Company is focusing on three major areas of concern for the Y2K issue:
embedded  technology  and  infrastructure  equipment,   non-embedded  technology
equipment and third party suppliers compliance.  The Y2K compliance team created
a five stage process for becoming Y2K compliant. The five process stages are (1)
compiling a complete inventory of all date sensitive technology  equipment;  (2)
prioritizing  systems  affected based on revenues,  strategic  issues,  and risk
exposure;  (3)  performing  modification  of affected  systems;  (4)  completing
testing of  modified  systems;  and (5)  performing  implementation  of modified
systems.  The  Company  has  completed  the  inventory  of  its  date  sensitive
technology  equipment  and is in various  stages of  prioritizing  and testing a
number of the affected systems.

     Embedded technology and infrastructure  equipment.  The embedded technology
and  infrastructure  equipment area of concern  



                                       38
<PAGE>


consists primarily of switches,  POPs, fiber optic cables and various platforms.
Much of this  equipment  is  purchased  from third  party  vendors  and has been
certified by the vendor to be Y2K compliant.  The certified pieces of equipment,
such as many of the switches need only to be  individually  tested by the Vendor
and/or the Company to ensure compliance.  Much of the  infrastructure  equipment
contains  both  embedded  and  non-embedded   technology  requiring  duplicative
efforts.  Portions of this equipment,  such as the Magellan  platform,  have had
their  non-embedded   technology  certified  as  compliant  while  the  embedded
technology is non-compliant.  All embedded technology systems and infrastructure
equipment  are  scheduled to be Y2K compliant by the end of the third quarter of
1999. In addition,  in order to protect  against the  acquisition  of additional
non-compliant  products,  the Company now  requires  suppliers  to warrant  that
products sold or licensed to the Company are Y2K compliant.  However,  there can
be no assurance of the accuracy or completeness of any such representations made
to the Company.

     Non-embedded technology equipment.  Non-embedded technology systems include
predominately  applications  software  and  interfacing  software.  Much of this
equipment  has  previously  been  upgraded to Y2K  compliance  through  software
upgrades  and the  purchase  of new  systems.  Specific  areas  of  concern  for
non-embedded  technology  include  the  software  monitoring  and  managing  the
Company's  call center and customer  care  database as well as network  support.
Expenditures regarding non-embedded  technology are not expected to be material.
Nonetheless,  the Company is in the process of  prioritizing  those systems that
are not Y2K  compliant  and upgrading or replacing  non-compliant  systems.  All
non-embedded  technology systems are scheduled to be Y2K compliant by the end of
August 1999.

     Newly  consummated  acquisitions.  The Company is rapidly expanding through
increased capital expenditures and acquisitions of companies.  Upon acquisition,
acquired  companies  become  subject to the five step  process of  becoming  Y2K
compliant  as  discussed  above.  Time  lines  for  dates of  completion  of the
Company's  Y2K   compliance   process  are  developed   individually   for  each
acquisition.  Currently, all companies that have been acquired by the Company to
date are on schedule to be Y2K compliant by December 1999, however, there can be
no assurance that all acquired companies will be Y2K compliant by 2000.

     Third party  suppliers.  The Company is  currently  communicating  with its
critical  suppliers,  vendors and  customers  about their plans and  progress in
addressing  the Y2K  issue.  Detailed  evaluations  of the most  critical  third
parties have been  initiated.  The Company is also in the process of  evaluating
and  prioritizing the  environments in which the Company  operates.  Many of the
Company's residential and commercial markets include areas of emerging economies
where the Y2K  compliance  issue does not appear to be a  priority.  The Company
plans to monitor  progress  made in these areas to mitigate any future  exposure
however,  the Company has limited,  if any,  control  over the progress  made by
these third parties, and therefore, is unable to predict the potential effect on
the Company's  operations if the third parties in these foreign  markets fail to
address the Y2K issue.  These evaluations will be followed by the development of
contingency  plans,  commencing in the second quarter of 1999,  with  completion
expected by the end of the third quarter of 1999.

     Risk and  contingency  plan.  There are many risks  associated with the Y2K
issue,  including  the  possibility  of a failure of the  Company's  routing and
compression equipment,  computer,  and non-information  technology systems. Such
failures  could have a material  adverse  effect  upon the Company and may cause
systems  malfunctions,  incorrect  or  incomplete  transaction  processing,  the
inability  to  reconcile  accounting  books and  records,  the  inability of the
Company to manage its  business  as well as  potentially  losing  customers  and
increasing  risk associated with  litigation.  In addition,  even if the Company
successfully becomes Y2K compliant,  it can be materially and adversely affected
by  failures  of third  parties to become Y2K  compliant.  The  failure of third
parties with which the Company has financial or operational  relationships  such
as LECs,  carriers,  cable  suppliers,  billing  agents,  satellite  facilities,
equipment suppliers,  financial  institutions,  payroll contractors,  regulatory
agencies and utility companies, to become Y2K compliant in a timely manner could
result in material adverse effects on the Company's  results of operations.  The
Company is currently  working  diligently  to become Y2K  compliant by the third
quarter of 1999.  However,  there can be no  assurance  that the Company will be
successful  in taking  corrective  action in a timely  manner.  The  Company has
started to develop  contingency plans with regard to its key technology systems,
although  there  can  be  no  assurance  that  these   contingency   plans  will
successfully  avoid a service  disruption.  The Company  intends to document Y2K
contingency plans as part of its Y2K risk mitigation  efforts by the end of July
1999.

     Costs. Total costs incurred up to December 31, 1998 specifically associated
with becoming Y2K compliant  have been less than $300,000.  The total  estimated
specific  costs of becoming  Y2K  compliant  is  estimated  to be less than $1.5
million.  These  costs will be  included  in the Y2K  compliance  costs once the
specific Y2K components can be identified and allocated.  Costs  associated with
the  identification  and testing of third party compliance will also be included
once such costs can be identified.

     Readers  are  cautioned  that  certain of the  statements  made herein with
respect to the Y2K issue are forward-looking statements. These statements, which
include statements concerning the Company's  expectations about future costs and
timely  completion of its Y2K  modifications  are subject to uncertainties  that
could cause actual  results to differ  materially  from what has been  discussed
above. Factors that could influence the amount of future costs and the effective
timing of remediation  efforts include the success of the Company in identifying
embedded  technology  and  infrastructure  equipment  as  well  as  non-embedded
equipment  that  contain   two-digit  year  codes,  the  nature  and  amount  of
programming  and  testing  required to upgrade or replace  each of the  affected
systems and equipment, the nature and amount of testing,  verification, the rate
and  magnitude  of  related  labor  costs,  and  the  success  of the  Company's
suppliers, in addressing the Y2K issue.




                                       39
<PAGE>


     Recent accounting pronouncements

     Effective  January 1, 1998,  the Company  adopted SFAS No. 130,  "Reporting
Comprehensive  Income".  SFAS No. 130  requires the  reporting of  comprehensive
income  (loss) in addition to net income (loss) from  operations.  Comprehensive
income is a more inclusive  reporting  methodology  that includes  disclosure of
certain  financial  information that historically has not been recognized in the
calculation  of net  loss.  The  adoption  of SFAS No.  130 had no impact on the
Company" net loss, as reported, and comprehensive loss.

     In June 1997,  SFAS No. 131,  "Disclosures  about Segments of an Enterprise
and Related  Information" ("SFAS 131"), was issued which redefines how operating
segments  are   determined  and  requires   disclosures  of  certain   financial
descriptive  information about a company's  operating  segments.  The January 1,
1998 adoption of SFAS No. 131  currently has had minimal  impact on the required
disclosures  and descriptive  information  about the Company's  operations.  The
Company  operates  in a single  business  segment  managed on a regional  basis.
Currently, operating segments outside the North American region are immaterial.

     In March 1998,  Statement of Position  98-1,  "Accounting  for the Costs of
Computer  Software  Developed or Obtained for Internal  Use" ("SOP  98-1"),  was
issued which provides  guidance on addressing  whether and under what conditions
the costs of internal use software should be capitalized.  SOP 98-1 is effective
for all  transactions  entered into in fiscal years beginning after December 15,
1998;  however,  earlier  adoption  is  encouraged.   The  Company  adopted  the
guidelines  of SOP 98-1 on  January  1,  1998,  pursuant  to which  the  Company
capitalized approximately $910,000 for 1998.

     In April 1998,  Statement  of  Position  98-5,  "Reporting  on the Costs of
Start-Up  Activities"  ("SOP  98-5"),  was issued which  requires  that entities
expense costs of start-up  activities as incurred.  The Company adopted SOP 98-5
on  January  1, 1998 and  expensed  approximately  $166,000  of  start-up  costs
incurred for organizational  activities associated with the Company's facilities
in the United Kingdom in 1998.

     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

     The Company is exposed to market risk, including changes in interest rates,
and to foreign  currency  exchange  rate risks.  The  Company  does not hold any
financial  instruments  for  trading  purposes.  The Company  believes  that its
primary  market risk exposure  relate the effects that changes in interest rates
have on its investments and those portions of its outstanding  indebtedness that
do not have fixed rates of interest.  In this regard,  changes in interest rates
affect the interest  earned on the Company's  investments  in cash  equivalents,
which consist  primarily of demand deposits and money market accounts,  and U.S.
Government  obligations  which have been purchased by the Company and pledged to
make certain  interest  payments on the Senior  Notes.  In addition,  changes in
interest rates impact the fair value of the Company's long-term debt obligations
(including  the Senior  Notes).  As of December 31, 1998,  the fair value of the
Senior Notes was approximately $144 million and the fair value of the securities
pledged to make certain interest  payments on the Senior Notes was approximately
$45.18 million.  Changes in interest rates also affect the Company's  borrowings
under  its  vendor  financing  facility  with  NTFC,  which  provides  that each
borrowing under the facility bears interest at a fixed rate equal to the average
yield to  maturity  of the  five-year  Treasury  Note plus an  agreed-upon  rate
adjustment.

     The  Company's  foreign  operations  to date have not been  material,  and,
therefore  any foreign  exchange  rate  fluctuations  relating to the  Company's
results of foreign  operations have also not been material.  The Company has not
entered into foreign  currency  exchange  forward  contracts or other derivative
arrangements to manage risks associated with foreign exchange rate fluctuations.
Foreign  exchange rate  fluctuations  exposure may increase in the future as the
size and scope of the Company's foreign operations increases.

     Additional  information  relating  to the  fair  value  of  certain  of the
Company's  financial  assets and liabilities is included in Note 11 in the Notes
to Consolidated Financial Statements.




                                       40
<PAGE>




ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                                                 PAGE
                                                                                                                 ----

<S>                                                                                                              <C>
  Report of Independent Public Accountants........................................................................42

  Consolidated Statements of Operations for the years ended
       December 31, 1998, 1997 and 1996...........................................................................43

  Consolidated Balance Sheets as of December 31, 1998 and 1997....................................................44

  Consolidated Statements of Changes in Stockholders' Equity
       (Deficit) for the years ended December 31, 1998, 1997 and 1996.............................................45

  Consolidated Statements of Cash Flows for the years ended December 31, 1998,
       1997 and 1996..............................................................................................46

  Notes to Consolidated Financial Statements......................................................................47

</TABLE>




                                       41
<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Startec Global Communications Corporation:

         We have audited the accompanying consolidated balance sheets of Startec
Global  Communications  Corporation (a Maryland corporation) and subsidiaries as
of  December  31,  1998 and 1997,  and the related  consolidated  statements  of
operations,  changes in stockholders' equity (deficit),  and cash flows for each
of the three  years in the period  ended  December  31,  1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all material  respects,  the  financial  position of Startec  Global
Communications  Corporation and subsidiaries,  as of December 31, 1998 and 1997,
and the results of their  operations  and their cash flows for each of the three
years in the period ended  December  31,  1998,  in  conformity  with  generally
accepted accounting principles.

                                                 ARTHUR ANDERSEN LLP

Washington, D.C.
February 23, 1999




                                       42
<PAGE>



           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                 FOR THE YEAR ENDED DECEMBER 31,
                                                                            -----------------------------------------
                                                                                1998          1997           1996
                                                                            -------------  ------------   ------------
<S>                                                                           <C>           <C>            <C>     
             Net revenues.................................................    $161,169      $ 85,857       $ 32,215
             Cost of services.............................................     141,176        75,783         29,881
                                                                            -------------  ------------   ------------

                   Gross margin...........................................      19,993        10,074          2,334
             General and administrative expenses..........................      20,520         6,288          3,996
             Selling and marketing expenses...............................       7,876         1,238            514
             Depreciation and amortization................................       2,253           451            333
                                                                            -------------  ------------   ------------

                   Income (loss) from operations..........................     (10,656)        2,097         (2,509)
             Interest expense.............................................     (12,830)         (762)          (337)
             Interest income..............................................       5,426           313             16
                                                                            -------------  ------------   ------------

                   Income (loss) before income taxes......................     (18,060)        1,648         (2,830)     
             Income tax provision.........................................           -            29              -
                                                                            -------------  ------------   ------------

                   Income (loss) before extraordinary item................     (18,060)        1,619         (2,830)
             Extraordinary item-loss on early extinguishment of debt......        (514)            -              -
                                                                            -------------  ------------   ------------

                   Net income (loss)......................................   $ (18,574)     $  1,619       $ (2,830)
                                                                            =============  ============   ============

             Basic earnings (loss) per common share:
             Income (loss) before extraordinary item......................    $  (2.02)     $   0.26       $  (0.52)
             Extraordinary item-loss on early extinguishment of debt......       (0.06)            -              -
                                                                            -------------  ------------   ------------
             Basic earnings (loss) per common share.......................    $  (2.08)     $   0.26       $  (0.52)
                                                                            =============  ============   ============

             Diluted earnings (loss) per common share:
             Income (loss) before extraordinary item......................    $  (2.02)     $   0.25       $  (0.52)
             Extraordinary item-loss on early extinguishment of debt......       (0.06)            -              -
                                                                            -------------  ------------   ------------
             Diluted earnings (loss) per common share.....................    $  (2.08)     $   0.25       $  (0.52)
                                                                            =============  ============   ============

</TABLE>


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




                                       43
<PAGE>



           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                            ----------------------
                                                                                              1998         1997
                                                                                            ---------    ---------
<S>                                                                                         <C>          <C>
                                     ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................            $  81,456    $  26,114
Accounts receivable, net of allowance for doubtful accounts of $2,659
      and $2,353, respectively..................................................               40,370       16,980
Accounts receivable, related party..............................................                  684          377
Other current assets............................................................                3,916        1,743
                                                                                            ---------    ---------

           Total current assets.................................................              126,426       45,214

 Property and equipment, net of accumulated depreciation and amortization of
      $3,493 and $1,240, respectively...........................................               43,525        5,184
 Restricted cash and pledged securities.........................................               44,336          180
 Intangibles, net and other long term assets....................................               11,695          952
                                                                                            ---------    ---------
                                                                                            $ 225,982    $  51,530
                                                                                            =========    =========


                             LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................            $  36,273    $  15,420
Accrued expense.................................................................                6,845        3,728
Vendor financing................................................................                1,476           --
Capital lease obligations.......................................................                  402          331
Note payable to individuals and other...........................................                   16           --
                                                                                            ---------    ---------
           Total current liabilities............................................               45,012       19,479

Senior notes....................................................................              158,022           --
Vendor financing, net of current portion........................................                7,409           --
Capital lease obligations, net of current portion...............................                   59          417
Note payable to individuals and other...........................................                   --           44
                                                                                            ---------    ---------
           Total liabilities....................................................              210,502       19,940
                                                                                            ---------    ---------

STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 20,000,000 shares authorized, 8,964,815
      and 8,811,999 shares issued and outstanding, respectively.................                   90           88
Additional paid-in capital......................................................               39,632       37,221
Unearned compensation...........................................................                 (190)        (241)
Accumulated deficit.............................................................              (24,052)      (5,478)
                                                                                            ---------    ---------
           Total stockholders' equity...........................................               15,480       31,590
                                                                                            ---------    ---------
                                                                                            $ 225,982    $  51,530
                                                                                            =========    =========
</TABLE>


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


                                       44
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
      CONSOLIDATED 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    COMPENSATION     DEFICIT
                                           --------- --------- -------  ---------  -----------  -------------  ------------  
<S>                                          <C>     <C>          <C>    <C>        <C>          <C>           <C>        
Balance at December 31, 1995                 5,381   $   54       22     $   22     $   932      $       -     $   (4,267)
   Net loss.................................     -        -       -          -            -              -         (2,830)
                                            -------- --------- -------  ---------  -----------  -------------  -----------   

Balance at December 31, 1996                 5,381       54      22         22          932              -         (7,097)
   Net income...............................     -        -       -          -            -              -          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)             -              -
   Net proceeds from initial public offering.3,278       33       -          -       34,961              -              -
   Exercise of employee stock options.....     136        1       -          -          143              -              -
   Unearned compensation pursuant to
       issuance of stock options.............    -        -       -          -          385             (385)           -
   Amortization of unearned compensation         -        -       -          -            -              144            -
   Warrants issued in connection with
       equity and debt placement.............    -        -       -          -          823                -            -
                                            -------- --------- -------  ---------  -----------  -------------  -----------   
Balance at December 31, 1997                 8,812       88       -          -       37,221             (241)      (5,478)
   Net loss.................................     -        -       -          -            -                -      (18,574)
   Amortization of unearned compensation.        -        -       -          -            -               51            -
   Exercise of employee stock options.......   129        2       -          -          260                -            -
   Shares issued in repayment of
       note payable to individual............   24        -       -          -           44                -            -
   Warrants issued in connection with                                                                                   -
       Senior Notes Offering.................    -        -       -          -        2,107                -            -
                                            -------- --------- -------  ---------  -----------  -------------  -----------   
Balance at December 31, 1998                 8,965   $   90       -     $    -     $ 39,632     $       (190)  $  (24,052)
                                            ======== ========= =======  =========  ===========  =============  ===========   

</TABLE>

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




                                       45
<PAGE>



           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                           FOR THE YEAR ENDED DECEMBER 31,
                                                                                    ----------------------------------------------
                                                                                         1998             1997           1996
                                                                                    ---------------  --------------- -------------
<S>                                                                                   <C>               <C>            <C> 
        OPERATING ACTIVITIES:
        Net income (loss).......................................................      $   (18,574)      $   1,619      $  (2,830)
        Extraordinary item-loss on early extinguishment of debt.................              514               -              -
        Adjustments to net income (loss):
          Depreciation and amortization.........................................            2,253             451            333
          Compensation pursuant to stock options................................               51             144              -
          Amortization of deferred debt financing costs and debt
             discounts..........................................................              947             237              -
        Changes in operating assets and liabilities:
          Accounts receivable, net..............................................          (22,315)        (11,646)        (3,113)
          Accounts receivable, related party....................................             (307)           (299)           241
          Accounts payable......................................................           13,248           8,249          2,515
          Accrued expenses......................................................              745             (45)         1,578
          Other.................................................................           (2,039)           (429)           (80)
                                                                                    ---------------  --------------- -------------
             Net cash used in operating activities..............................          (25,477)         (1,719)        (1,356) 
                                                                                    ---------------  --------------- -------------
        INVESTING ACTIVITIES:
        Acquisitions............................................................          (2,648)               -              -
        Purchases of property and equipment.....................................         (34,931)          (3,881)          (520)
                                                                                    ---------------  --------------- -------------
             Net cash used in investing activities..............................         (37,579)          (3,881)          (520)
                                                                                    ---------------  --------------- -------------
        FINANCING ACTIVITIES:
        Proceeds from Senior Notes and Warrants Offering........................         160,000                -              -
        Proceeds from sale of pledged securities................................           8,261                -              -
        Proceeds from vendor financing..........................................           8,885                -              -
        Net proceeds from issuance of common stock..............................             262           34,994              -
        Investments in pledged securities.......................................         (52,417)               -              -
        Payments of debt financing costs........................................          (6,222)            (366)             -
        Repayments under capital lease obligations..............................            (371)            (402)           (91)
        Net borrowings (repayments) under receivables-based
             credit facility....................................................               -           (1,812)         1,242
        Borrowings under notes payable to individuals and other.................               -                -            475
        Repayments under notes payable to individuals and other.................               -             (650)          (125)
        Repayments under notes payable to related parties.......................               -             (153)            (5)
        Purchase and retirement of nonvoting common stock.......................               -              (45)             -
                                                                                    ---------------  --------------- -------------
             Net cash provided by financing activities..........................         118,398           31,566          1,496
                                                                                    ---------------  --------------- -------------
        INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... ...................          55,342           25,966           (380)
        CASH AND CASH EQUIVALENTS, beginning of year............................          26,114              148            528
                                                                                    ---------------  --------------- -------------
        CASH AND CASH EQUIVALENTS, end of year..................................      $   81,456       $   26,114       $    148
                                                                                    ===============  =============== =============
        SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
        Interest paid...........................................................      $    9,408       $      591       $    296
        Income taxes paid.......................................................              10               19

        SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
        Equipment acquired under capital lease..................................      $       84       $      378       $    524
        Shares issued in repayment of note payable to individual................              44                -              -
        Accrued expenses converted to a note....................................               -               44              -

</TABLE>


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




                                       46
<PAGE>

           
           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     Organization

     Startec Global Communications Corporation (the "Company", formerly Startec,
Inc.),  is a  Maryland  corporation  founded  in 1989 to  provide  international
long-distance  telephone services.  The Company currently offers U.S.-originated
international 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.

     In 1998,  the  Company's  board of directors  and  stockholders  approved a
reorganization  pursuant to which the  Company's  corporate  structure  would be
realigned   to   that   of  a   publicly   traded   Delaware   holding   company
("Reorganization"). Pursuant to the reorganization plan, subsequent to year end,
all of the Company's assets were transferred into a Delaware  subsidiary company
("New  Parent"),  with  a  subsequent  transfer  of  those  assets  to  multiple
subsidiaries  of the New  Parent.  The Company was then merged with and into the
New Parent with the New Parent then assuming the Company's  name. The merger did
not impact the consolidated financial statements of the Company.

     In October 1997, the Company  completed an Initial  Public  Offering of its
common stock (the "Initial Public Offering").  Together with the exercise of the
overallotment  option in November  1997,  the  Initial  Public  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 million.

     Principles of consolidation

     The consolidated  financial  statements of the Company include the accounts
of the Company and its  wholly-owned  subsidiaries.  All  material  intercompany
transactions and balances have been eliminated.

     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. During 1998,
the Company  recorded a net  favorable  retroactive  PTT rate  adjustment in the
amount of $953,000 in a manner  consistent with its policy of recording  credits
when  received.  The rate  adjustment  relates to  traffic  sent from April 1997
through  December 1998 and is reflected in cost of services in the  accompanying
consolidated statement of operations. These rate adjustments occur routinely.

     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.

     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  $2.6 million,  $1.4
million and $1.1 million, or 2 percent, 2 percent, and 3 percent of net revenues
in 1998,  1997, and 1996,  respectively.  There can be no assurance that traffic
will be




                                       47
<PAGE>



           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

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
received and revenues recorded by the Company.

     International operations

     The  consolidated  statements  of  operations  include  amounts  related to
non-U.S.   subsidiaries.  In  1998,  the  Company  recognized  net  revenues  of
approximately  $23,000 and a net loss of approximately  $340,000 attributable to
non-U.S. subsidiaries.

     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 Note 4).

     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 consolidated balance sheets approximates fair value.

     Pledged Securities and restricted cash

     In  connection  with the Senior  Notes and Warrants  Offering,  the Company
placed $52 million of net proceeds into marketable  securities to fund the first
six payments of interest on the Senior Notes which are payable  semi-annually in
November and May.  Subsequent  to the November 1998  interest  payment,  pledged
securities  totaled  $44.2  million.  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.  The
pledged  securities  and  restricted  cash are shown as long term  assets in the
accompanying  consolidated  balance  sheets.  The Company has both the  positive
intent and  ability to hold the pledged  securities  and  restricted  cash until
maturity. Accordingly, these instruments are carried at amortized cost.

     Other current assets

     Included in other current assets as of December 31, 1997, 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.  All amounts
due from  employees  for the payment of the exercise  price and related  payroll
taxes were  collected  in January  1998.  During 1998,  the Company  advanced an
aggregate  of  approximately  $1.4  million  to  certain  of its  employees  and
officers.  The secured loans bear interest at a rate of 7.87% per year,  and are
due and payable on December  31, 1999.  The loans are included in other  current
assets in the accompanying consolidated balance sheets.

     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, 1998 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.  As a  result,  the  carrying  amount of
long-lived assets could be reduced materially in the future.

     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:




                                       48
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED


         Property and leasehold improvements.....................       5 years
         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  $1,540,000  and  $1,456,000 as of
December 31, 1998 and 1997, respectively.

     Maintenance  and  repairs  are  expensed  as  incurred.   Replacements  and
improvements  are  capitalized.  Gains on sales of assets are  recognized at the
time of sale or deferred to the extent required by generally accepted accounting
principles.

     Intangible  assets

     Intangible assets,  capitalized in connection with acquisitions made during
the fourth quarter of 1998 are reflected within  intangibles and other long term
assets in the accompanying  consolidated  balance sheets.  At December 31, 1998,
intangible assets,  net of accumulated  amortization,  consisted of goodwill,  a
German telecommunications license and a covenant not to compete of $3.5 million,
$1.8 million and $250,000,  respectively.  Goodwill and covenants not to compete
are amortized on a straight-line  basis over 30 and 5 years,  respectively.  The
German  telecommunications  license  acquired  through the acquisition of Global
Communications  GmbH of Germany is  amortized on a  straight-line  basis over 30
years. Accumulated amortization at December 31, 1998 was immaterial.

     Debt discounts and deferred debt financing costs

     Deferred debt  financing  costs of $6.2  million,  net of  amortization  of
$380,000  incurred  primarily  in  connection  with the 1998  Senior  Notes  and
Warrants  Offering are reflected  within  intangible and other long term assets.
Debt discounts associated with the Senior Notes and Warrants Offering total $2.1
million,  net of  amortization  of $129,000 are  reflected as a reduction of the
Senior Notes.  Debt  discounts and deferred debt  financing  costs are amortized
over the remaining life of the debt using the effective interest method.

     Concentration of credit 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 32 and 44 percent of gross accounts  receivable as of
December  31,  1998 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  30 and 47  percent  of  cost  of
services for the years ended December 31, 1998 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  4and 7 percent of cost of services in the year ended  December 31,
1998 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 common 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.  Weighted  average
common shares  outstanding 




                                       49
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED



consist of the following as of December 31, 1998 (in thousands):

<TABLE>
<CAPTION>
                                                        1998            1997          1996
                                                    ------------   ------------  -------------
<S>                                                     <C>           <C>            <C>  
      Weighted average common shares
           outstanding - basic......................    8,945         6,136          5,403
      Stock options and warrant
           equivalents..............................        -           287              -
                                                    ------------   ------------  -------------
      Weighted average common and
           equivalent shares outstanding - diluted..    8,945         6,423          5,403
                                                    ============   ============  =============
</TABLE>


     Options and  warrants to purchase  1,366,726  and 138,300  shares of common
stock,  were excluded from the computation of diluted loss per share in 1998 and
1996,   respectively,   because   inclusion  of  these  options  would  have  an
anti-dilutive effect on loss per share.

     Advertising costs

     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 accompanying
consolidated statements of operations.

     Year 2000

     The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify the year. The effects of the Year 2000 issue may be
experienced  before,  on, or after January 1, 2000,  and if not  addressed,  the
impact on  operations  and  financial  reporting  may range from minor errors to
significant systems failure, which could affect the Company's ability to conduct
normal business operations. It is not possible to be certain that all aspects of
the Year 2000  issue  affecting  the  Company,  including  those  related to the
efforts of  customers,  suppliers,  vendors or other third parties will be fully
resolved.

     Risk 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.

     The  Company  has  devoted  substantial  resources  to the  buildout of its
network and the  development  and  expansion  of its  marketing  programs.  As a
result,  the Company  experienced  operating losses and negative cash flows from
operations in 1998. These losses and negative  operating cash flows are expected
to continue for additional periods in the future. There can be no assurance that
the Company's  operations will become  profitable or will produce  positive cash
flows.  The Company's  capital  requirements  for the continued  buildout of its
network and growth of its customer base are substantial.  The Company intends to
fund its operational and capital requirements in 1999 using cash on hand and its
available credit facility.  However,  there can be no assurance that the Company
will not need additional  external financing sooner than currently  anticipated,
or that such financing would be available on terms  management  finds acceptable
or at all.  In the event that the  Company is unable to obtain  such  additional
financing, it will be required to limit or curtail its expansion plans.

     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.





                                       50
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED


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.

     Recent accounting pronouncements

     Effective  January 1, 1998,  the Company  adopted SFAS No. 130,  "Reporting
Comprehensive  Income".  SFAS No. 130  requires the  reporting of  comprehensive
income  (loss) in addition to net income (loss) from  operations.  Comprehensive
income is a more inclusive  reporting  methodology  that includes  disclosure of
certain  financial  information that historically has not been recognized in the
calculation  of net  loss.  The  adoption  of SFAS No.  130 had no impact on the
Company's net loss, as reported, and comprehensive loss.

     In June 1997,  SFAS No. 131,  "Disclosures  about Segments of an Enterprise
and Related  Information" ("SFAS 131"), was issued which redefines how operating
segments  are   determined  and  requires   disclosures  of  certain   financial
descriptive  information about a company's  operating  segments.  The January 1,
1998 adoption of SFAS No. 131  currently has had minimal  impact on the required
disclosures  and descriptive  information  about the Company's  operations.  The
Company  operates  in a single  business  segment  managed on a regional  basis.
Currently, operating segments outside the North American region are immaterial.

     In March 1998,  Statement of Position  98-1,  "Accounting  for the Costs of
Computer  Software  Developed or Obtained for Internal  Use" ("SOP  98-1"),  was
issued which provides  guidance on addressing  whether and under what conditions
the costs of internal use software should be capitalized.  SOP 98-1 is effective
for all  transactions  entered into in fiscal years beginning after December 15,
1998;  however,  earlier  adoption  is  encouraged.   The  Company  adopted  the
guidelines  of SOP 98-1 on  January  1,  1998,  pursuant  to which  the  Company
capitalized approximately $910,000 for 1998.

     In April 1998,  Statement  of  Position  98-5,  "Reporting  on the Costs of
Start-Up  Activities"  ("SOP  98-5"),  was issued which  requires  that entities
expense costs of start-up  activities as incurred.  The Company adopted SOP 98-5
on  January  1, 1998 and  expensed  approximately  $166,000  of  start-up  costs
incurred for organizational  activities associated with the Company's facilities
in the United Kingdom in 1998.

2. ACCOUNTS RECEIVABLE:

     Accounts receivable consist of the following (in thousands):

                                                 DECEMBER 31,
                                          ---------------------------
                                              1998           1997      
                                          ------------  -------------
  Residential..........................    $ 20,340       $  9,560
  Carrier..............................      22,689          9,773
                                          ------------  -------------
                                             43,029         19,333
  Allowance for doubtful accounts......      (2,659)        (2,353)
                                         ------------  -------------
                                           $ 40,370       $ 16,980
                                         ============  =============


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



                                       51
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED


3. PROPERTY AND EQUIPMENT:

     Property and equipment, including equipment under capital leases consist of
the following at December 31, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
                                                                    DEPRECIABLE
                                                                       LIVES           1998         1997
                                                                  ---------------- ------------- ------------

<S>                                                                   <C>             <C>            <C>    
              Property and leasehold improvements                     5 years         $  1,314       $   186
              Long distance communications equipment               7 to 20 years        29,017         3,305   
              Company  and office equipment                        3 to 5 years          4,746           838
                                                                                   ------------- ------------
                                                                                        35,077         4,329
              Less: accumulated depreciation and amortization                           (3,493)       (1,240) 
                                                                                   ------------- ------------
                                                                                         31,584        3,089
              Construction in progress                                                   11,941        2,095
                                                                                   ------------- ------------
                                                                                       $ 43,525     $  5,184
                                                                                   ============= ============
</TABLE>



     Depreciation  expense for the years ended December 31, 1998,  1997 and 1996
was $2.3 million , $451,000, and $333,000 respectively. Construction in progress
consists primarily of network infrastructure  equipment that has not been placed
into service; accordingly no depreciation has been recorded.

4. ACCRUED EXPENSES:

     Accrued expenses consist of the following (in thousands):

                                                                  DECEMBER 31,

                                                                ---------------
                                                                  1998     1997
                                                                ------   ------
Accrued interest ...........................................    $2,496   $   22
Disputed vendor charges ....................................       774    2,124
Accrued marketing expense ..................................       667       --
Accrued payroll and related taxes...........................       513    1,194
Accrued excise taxes and related charges ...................     1,295       --
Other ......................................................     1,100      388
                                                                ------   ------
                                                                $6,845   $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 provided  approximately  $67,000 in the year ended December
31, 1997  related to disputed  minutes for which the Company has not  recognized
any  corresponding  revenue.  During 1998,  the Company paid  $1,350,000  of the
disputed charges and continues to dispute the remaining balance.  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. DEBT:

         Debt consists of the following (in thousands):

                                                                DECEMBER 31,
                                                           --------------------
                                                             1998       1997
                                                           ---------    -------
Senior notes, with a rate of 12% due May 2008 ............ $ 160,000    $    --
NTFC Financing Agreement, with a rate of 8.91%             
     maturing January 2004 ...............................     8,885         --
Note payable to individuals and other.....................        16         44
Capital lease obligations.................................       461        748
                                                           ---------    -------
                                                             169,362        792
Less: discount on Senior Notes............................    (1,978)        --
Less: current portion ....................................    (1,894)      (331)
                                                           ---------    -------
                                                           $ 165,490    $   461
                                                           =========    =======




                                       52
<PAGE>

           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED


Senior Notes and Warrants Offering

     In May 1998, the Company issued $160 million of 12% senior  unsecured notes
("Senior Notes") with a final maturity of May 2008. Warrants to purchase 200,226
shares  of common  stock  were  issued  in  conjunction  with the  Senior  Notes
issuance.  The Senior  Notes are recorded at a discount of $2.1 million to their
face amount to reflect the fair market value  attributable to the warrants.  The
warrants are  exercisable  subsequent to November  1998 at an exercise  price of
$24.20 per share.  The Company  received  net proceeds of $155  million,  net of
offering  expenses.  Concurrent  with the  issuance,  the Company  purchased $52
million in U.S. Government  obligations from proceeds of the offering.  The U.S.
Government  obligations  are pledged to fund the first six interest  payments on
the Senior  Notes.  Interest  on the Senior  Notes is payable  semi-annually  in
arrears in May and November  commencing  November 1998.  Accrued  interest as of
December 31, 1998 was $2.5 million.  As of December 31, 1998, no Warrants issued
in connection with the Senior Notes have been exercised.

     Under the terms of the  Senior  Notes,  the  Company  is subject to certain
covenants  which,  among other  things,  restrict  the ability of the Company to
incur additional indebtedness, pay dividends or make distributions in respect to
capital stock or make certain  restricted  payments;  create liens;  or merge or
sell all or substantially all of its assets.  The Senior Notes are redeemable at
the option of the Company,  in whole or in part on or after May 15, 2003, at the
redemption  prices  set forth  below,  plus  accrued  and  unpaid  interest  and
liquidated  damages  as  defined  in the  indenture,  if  any,  to the  date  of
redemption.

                                                     REDEMPTION 
              YEAR                                     PRICE
             ---------                          -------------------
               2003..........................           106%
               2004..........................           104%
               2005..........................           102%
               2006(and thereafter)..........           100%


     In  addition,  at any time prior to May 15,  2001,  through  proceeds  of a
public  equity  offering,  the Company may redeem up to 35% of the Senior  Notes
originally  outstanding  at a redemption  price of 112% of the principal  amount
thereof, plus accrued and unpaid interest and liquidated damages, if any, to the
date of  redemption.  Upon a change of control,  the Company will be required to
offer to repurchase the outstanding Senior Notes at a price equal to 101% of the
principal  amount  thereof,  plus  accrued and unpaid  interest  and  liquidated
damages, if any, to the date of purchase.

     The Senior  Notes are  unsecured  obligations  of the Company and rank pari
passu in right of  payment  with all other  existing  and future  unsecured  and
unsubordinated obligations of the Company unless expressly noted.

NTFC Capital Corp. Financing Agreement

     In December 1998, the Company entered into a vendor financing  facility for
up to $35 million with NTFC Capital  Corporation,  a financing arm of GE Capital
("NTFC Facility"). The facility and may be used to finance switches,  associated
telecommunications  equipment, undersea fiber optic cables, and the expansion of
facilities in the Company's  targeted  marketing areas. Each borrowing under the
NTFC  Facility  bears  interest  at a fixed rate equal to the  average  yield to
maturity of the five-year  Treasury Note plus the Rate Adjustment (as defined in
the agreement). Individual borrowings under the NTFC Facility are amortized over
60 months  from the date of advance  with a final  maturity  of all  outstanding
amounts of January  2004.  As of December 31, 1998,  approximately  $8.9 million
bearing  interest at 8.91% was  outstanding  under the  facility.  Principal and
interest payments of approximately $184,000 are due monthly in arrears.

     Under the terms of the NTFC  Facility,  the  Company  is subject to certain
financial and operational  covenants,  including but not limited to restrictions
on the Company's ability to pay dividends and level of indebtedness.

Commercial Loan Agreement

     In July 1997,  the Company  entered into a loan  agreement  ("Loan") with a
commercial bank  ("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




                                       53
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

accounts receivable, as defined, thereafter until maturity in December 1999. The
Loan required a $150,000  commitment fee to be paid at closing,  and a quarterly
commitment fee of one quarter percent of the unused  portion.  In December 1998,
the Company terminated the Loan. In connection with the termination, the Company
recognized  an  extraordinary  loss of  $514,000  related  to the  write-off  of
deferred financing costs and debt discounts related to the Loan.

     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.  Fifty  percent,  or
269,900 of the warrants,  vested fully on the date of the  issuance.  Vesting on
the remaining  warrants was contingent on the occurrence of certain  events.  In
December 1997, as a result of the Company's completed Initial Public Offering of
common stock,  the remaining  warrants were retired.  The exercise  price of the
outstanding  warrants is $8.46 per share,  and they expire on July 1, 2002.  The
fair market value of the warrants is approximately $823,000 and is classified as
a component of stockholders'  equity. As of December 31, 1998,  269,900 warrants
from this issuance were outstanding.

     Debt  maturities  as  of  December  31,  1998,   excluding   capital  lease
obligations, are as follows (in thousands);

         1999............................................    $  1,475
         2000...........................................        1,613
         2001...........................................        1,763
         2002...........................................        1,927
         2003...........................................        2,107
         Thereafter.....................................      160,000
                                                           -----------
                                                            $ 168,885
                                                           ===========


6. COMMITMENTS AND CONTINGENCIES:

     Leases

     The  Company  leases  office  space  and  equipment  under   non-cancelable
operating  leases.  Rent expense was  approximately  $1 million,  $313,000,  and
$135,000 for the years ended December 31, 1998,  1997,  and 1996,  respectively.
The terms of the office lease require the Company to pay a  proportionate  share
of real estate taxes and operating  expenses.  The Company also leases equipment
under capital lease  obligations.  The future  minimum  commitments  under lease
obligations are as follows (in thousands):

                                                CAPITAL      OPERATING
      FOR THE YEAR ENDING DECEMBER 31,          LEASES         LEASES
   ----------------------------------------   ------------  -------------
   1999................................           $   434       $  2,031
   2000................................                60          2,000
   2001................................                 -          1,802
   2002................................                 -          1,589
   2003................................                 -            781
   Thereafter..........................                 -          1,320
                                              ------------  -------------
                                                      494       $  9,523
                                                            =============
   Less - Amounts representing interest..             (33)
   Less - Current portion................            (402)
                                              ------------
   Long-term Portion.....................        $     59
                                              ============

     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  in June 1996.  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.




                                       54
<PAGE>

           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED


     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
consolidated financial statements

7. STOCKHOLDERS' EQUITY (DEFICIT):

     Common and preferred stock

     In 1997,  the Board of  Directors  authorized  100,000  shares of $1.00 par
value preferred stock.  Concurrent with the approval of the Reorganization,  the
Board of Directors  approved an increase in the authorized  shares of common and
preferred stock.  Subsequent to year end 1998, total common and preferred shares
authorized increased to 40,000,000 and 1,000,000,  respectively  pursuant to the
Reorganization.  The Board of Directors  has the authority to issue these shares
and to determine the price,  rights,  preferences,  privileges and restrictions,
including  voting rights,  of those shares without further vote or action by the
stockholders.

     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.

     Stock option plans

     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. In 1998,
the Board of  Directors  and  stockholders  approved  an  increase in the shares
authorized for issuance under the Performance Plan to 18.5 percent of the common
shares outstanding. The options expire ten 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,  1998 and 1997,  approximately  914,890  and  352,000  options,
respectively, were available for grant under the Performance 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.  In
conjunction  with the  Company's  January 20, 1997  amendment  to the plan,  all
options  were  cancelled  and certain  options were  reissued at their  original
exercise  prices and  compensation  expense was recognized for the excess of the
fair value of the common stock over the exercise  price of the related  options.
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 Initial Public Offering.

     On December 14, 1998, the Company  repriced  581,150  options  outstanding,
which had exercise  prices  ranging  between  $10.00 and $26.75 per share to the
then market price of $9.00 per share.  This was the Company's first repricing of
options and the repricing did not benefit  executive  officers,  affiliates,  or
major shareholders.

          A summary  of the status of the  Company's  stock  option  plans as of
December  31, 1998,  1997 and 1996 and changes  during the years ending on those
dates is presented in the following chart:

<TABLE>
<CAPTION>
                                                  1998                      1997                       1996
                                        ------------------------- --------------------------  -------------------------
                                                       WEIGHTED                   WEIGHTED                  WEIGHTED
                                                       AVERAGE                    AVERAGE                    AVERAGE
                                                      PRICE PER                  PRICE PER                  PRICE PER
                                          OPTIONS       SHARE        OPTIONS       SHARE        OPTIONS       SHARE
                                        ------------  ----------- -------------- -----------  ------------ ------------
<S>                                         <C>         <C>            <C>           <C>          <C>          <C>    
   Options outstanding at beginning      
     of year January 1,                     531,666      $  9.96       138,300       $ 0.38      143,200      $  0.38
   Granted                                  977,900        10.54       668,366         8.14            -            -
   Exercised                               (125,816)        1.85      (136,500)        1.05            -            -
   Canceled                                (640,150)       12.81      (138,500)        0.38       (4,900)        0.36
                                        ------------  ----------- -------------- -----------  ------------ ------------
   Options outstanding at
     December 31,                           743,600      $  9.64       531,666      $  9.96       138,300     $  0.38
                                        ============  =========== ============== ===========  ============ ============
   Options exercisable at
     December 31,                            76,530      $  9.23       133,266      $  1.85             -     $     -
                                        ============  =========== ============== ===========  ============ ============
</TABLE>



                                       55
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED


   The following table summarizes information about stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE
              -----------------------------------------------------------------  ----------------------------
                                                   WEIGHTED
                                                   AVERAGE          WEIGHTED                       WEIGHTED
                                                   REMAINING        AVERAGE                        AVERAGE
                  RANGE OF          NUMBER       CONTRACTUAL       PRICE PER        NUMBER        PRICE PER
              EXERCISE PRICES     OUTSTANDING        LIFE            SHARE        EXERCISABLE       SHARE
              -----------------  -------------- ---------------   -------------  -------------- -------------
<S>            <C>                     <C>                <C>         <C>              <C>          <C> 
               $1.85 - $1.85             7,450            8.05        $   1.85           7,450      $   1.85
               $4.75 - $4.75            15,000            9.75            4.75              --            --
               $8.00 - $10.00          631,150            8.80            9.08          60,080          9.16
              $12.00 - $12.00            7,500            8.63           12.00           1,500         12.00
              $14.25 - $16.56           82,500            9.25           15.30           7,500         16.56
              -----------------  -------------- ---------------   -------------  -------------- -------------
               $1.85 - $16.56          743,600            8.86        $   9.64          76,530      $   9.23
              =================  ============== ===============   =============  ============== =============
</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,  1998 and 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 4.56
percent and 6.2 percent; no dividend yield;  weighted-average  expected lives of
the options of five years, and expected volatility of 95 percent and 50 percent,
respectively. 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 1998 and 1997,
was $7.84 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 1998 and 1996 would have
been approximately $19,125,000 and $2,833,000,  respectively, or $2.14 and $0.52
per share (basic and diluted), respectively. Pro forma net income for 1997 would
have been $1,600,000,  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.

     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 at issuance
was  approximately  $254,000 and will be  recognized  ratably over the estimated
service period.

     Stockholder rights plan

     The Board of Directors has adopted a stockholder  rights plan ("Rights" and
"Rights Plan"),  which is designed to protect the rights of its stockholders and
deter  coercive  or  unfair  takeover  tactics.  It is  not in  response  to any
acquisition  proposal.  Preferred  stock 




                                       56
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

purchase  rights  have been  granted as a dividend  at the rate of one Right for
each  outstanding  share of  Common  Stock  held of  record  as of the  close of
business on April 3, 1998.

     Each Right, when exercisable,  would entitle the holder thereof to purchase
1/1,000th of a share of Series A Junior  Participating  Preferred Stock ("Junior
Preferred  Stock") at a price of $175 per 1/1000th share. The Company's Board of
Directors  designated  25,000 shares of the authorized  Preferred Stock for this
purpose. The Rights, which have no voting rights, will expire on March 25, 2008.

     At the  time of  adoption  of the  Rights  Plan,  the  Rights  are  neither
exercisable  nor traded  separately  from the Common  Stock.  Subject to certain
limited  exceptions,  the Rights will be exercisable  only if a person or group,
other  than an Exempt  Person,  as  defined  in the  Rights  Plan,  becomes  the
beneficial  owner of 10% or more of the Common  Stock or  announces  a tender or
exchange  offer which would result in its ownership of 10% or more of the Common
Stock.  Ten  days  after a public  announcement  that a person  has  become  the
beneficial  owner of 10% or more of the Common Stock or ten days  following  the
commencement  of a tender  or  exchange  offer  which  would  result in a person
becoming the beneficial owner of 10% or more of the Common Stock (the earlier of
which is called the "Distribution Date"), each holder of a Right, other than the
acquiring  person,  would be entitled to purchase a certain  number of shares of
Common Stock for each Right at one-half of the then-current market price. If the
Company is acquired in a merger, or 50% or more of the Company's assets are sold
in one or more related transactions, each Right would entitle the holder thereof
to purchase common stock of the acquiring company at one half of the then-market
price of such common stock.

     At any time after a person or group becomes the beneficial  owner of 10% or
more of the Common  Stock,  the Board of  Directors  may  exchange  one share of
Common  Stock for each Right,  other than Rights held by the  acquiring  person.
Generally,  the Board of  Directors  may  redeem the Rights at any time until 10
days  following  the public  announcement  that a person or group of persons has
acquired  beneficial  ownership of 10% or more of the outstanding  Common Stock.
The redemption price is $.001 per Right.

     Warrant and registration rights

The  Company  agreed to issue to  certain  underwriters  of the  Initial  Public
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 when issued, and is
classified in stockholders' equity.

     As of December 31, 1998, the Company has warrants outstanding of 470,126 in
connection  with debt issuances and  agreements.  Warrants  issued in connection
with the Senior Notes and Warrants Offering have an exercise price of $24.20 and
expire  May  2008.  Warrants  issued  in  connection  with the  Commercial  Loan
Agreement  have an exercise price of $8.46 and are  exercisable  for a period of
five years  beginning July 1997. The holders of the warrants will have no voting
or other stockholder rights unless and until the warrants are exercised.

     Employee benefit plans

     During  1998,  the Company  adopted the Startec  Employee  401(K) Plan (the
"Plan"), a defined contribution 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.  In September 1998,
the Company adopted a contribution  matching plan pursuant to which the Company,
at its  discretion,  may contribute  shares of the Company's  Common Stock in an
amount up to five  percent of  employee  contributions.  These  shares will vest
ratably over a five year period from the date of employment.

8. INCOME TAXES:

     The Company  has net  operating  loss  carryforwards  ("NOLs")  for Federal
income tax purposes of approximately  $25,483,000 and $1,878,000, as of December
31, 1998 and 1997,  respectively,  which may be applied  against  future taxable
income and expire between 2010 and 2013. 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  and  projected  operating  losses,  a valuation
allowance  equal to the net  deferred  tax asset was  recorded  for all  periods
presented.




                                       57
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

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

                                                        DECEMBER 31,
                                                    1998            1997
                                                ------------   ------------
  Deferred tax assets:
    Net operating loss carryforwards.........   $     9,842    $       725
    Allowance for doubtful accounts..........         1,378            909
    Contested liabilities....................           553          1,024
    Cash to accrual adjustments..............           230            460
    Other....................................           155            119
                                                ------------   ------------
       Total deferred tax assets.............        12,158          3,237
                                                ------------   ------------
  Deferred tax liabilities:
    Depreciation.............................         1,227            204
    Other....................................            19             42
                                                ------------   ------------
       Total deferred tax liabilities........         1,246            246
                                                ------------   ------------

  Net deferred tax assets....................        10,912          2,991
  Valuation allowance........................       (10,912)        (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, 1998 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):

                                                                   1997
                                                              --------------
           Current Provision
                Federal....................................   $         171
                Federal alternative minimum tax............              29
                State......................................              23
                                                              --------------
                                                                        223
                                                              --------------
           Deferred benefit
                Federal....................................             (86)
                State......................................             (12)
                Benefit of net operating loss carryforwards.            (96)
                                                              --------------
                                                                       (194)
                                                              --------------
                                                              $          29
                                                              ==============

The provision  for income taxes for the year ended  December 31, 1997 results in
an effective rate which differs from the Federal statutory rate as follows:

                                                                  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%
                                                           ==============




                                       58
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

 
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  $1.9 million,  $1.9
million,  and $1.5 million, or 1, 2, and 5 percent of total net revenues for the
years ended December 31, 1998, 1997, and 1996, respectively.  The Company was in
a net accounts receivable position with this affiliate of approximately $684,000
and $377,000 as of December 31, 1998 and 1997,  respectively.  Services provided
by this affiliate and recognized in cost of services  amounted to  approximately
$366,000,  $680,000 and $663,000 for the years ended December 31, 1998, 1997 and
1996, respectively.

     The Company  also has a lease with an  affiliate  of a  stockholder  of the
Company (see Note 6).

10. BUSINESS SEGMENT DATA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS:

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

     Net revenues terminated by geographic area were as follows (in thousands):


                                             FOR THE YEAR ENDED DECEMBER 31,
                                       -----------------------------------------
                                           1998         1997          1996
                                           ----         ----          ----
 Asia/Pacific Rim.................      $ 72,274     $ 42,039       $ 13,824  
 Middle East/North Africa.........        30,303       21,236         8,276
 Sub-Saharan Africa...............        13,020        6,394         1,136
 Eastern Europe...................        15,539        7,964         2,650
 Western Europe...................         2,725        1,913         1,783
 North America....................         5,661        3,398         3,718 
 Other............................        21,647        2,913           828
                                       ------------   -----------  ------------
                                       $ 161,169     $ 85,857      $ 32,215  
                                      ============   ===========   ============

     Significant customers

     A  significant  portion of the  Company's  net  revenues is derived  from a
limited  number of customers.  During 1998,  1997 and 1996,  the Company's  five
largest carrier customers accounted for approximately 61 percent, 47 percent and
40 percent of net revenues, respectively. One customer accounted for ten percent
or more of net revenues in 1998 and 1996 while two  customers  accounted for ten
percent or more of net  revenues  during  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 the year indicated (in thousands):

                                         DECEMBER 31,
                           -------------------------------------------
                                   1998           1997           1996
                                   ----           ----           ----
        
  MCI/WorldCom, Inc............    $ 38,289     $ 19,886     $  7,383
  Frontier.....................        -          12,420         - 
                                                            



     Significant suppliers





                                       59
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED

     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 the year indicated (in thousands):

                                                   DECEMBER 31,
                                      --------------------------------------
                                            1998           1997       1996
                                            ----           ----       ----
                                                 
 Pacific Gateway Exchange..........       $ 14,421       $  8,893    $    -
 MCI/WorldCom, Inc.................              -          9,918     3,972
 Videsh Sanchar Nigam Limited ("VSNL")           -              -     7,525
 Cherry Communications...............            -              -     3,897


     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 India.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS:

     The fair value of certain financial assets and liabilities are shown below:


<TABLE>
<CAPTION>
                                                              DECEMBER 31, 1998
                                                         ----------------------------
                                                           CARRYING         FAIR
                                                            AMOUNT          VALUE
                                                         -------------   ------------
<S>                                                        <C>             <C>     
  Financial assets:                                      
    Pledged short-term marketable securities.........      $  44,156       $ 45,180
  Financial liabilities:                                 
    Senior Notes, excluding debt discount............        160,000        144,000
  Vendor financing...................................          8,885          8,885
</TABLE>


     Short-term  marketable  securities and the Senior Notes are valued based on
quoted market prices.  The fair value of the vendor financing is estimated based
on expected future payments  discounted at the Company's  incremental  borrowing
rate.

     The  carrying  amounts  for  current  assets,  restricted  cash and current
liabilities  approximate their fair value due to their short maturity.  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. However,  given the terms and
conditions  of these  instruments,  if these  financial  instruments  were  with
unrelated parties,  interest rates and payment terms could be different than the
currently stated rates and terms.

12. ACQUISITIONS:

     In November 1998, the Company acquired PCI Communications, Inc. ("PCI") for
$2.65  million.  PCI is a  provider  of voice and data  services  located in the
Pacific  Rim  island  of  Guam.   PCI  has   signatory   status  on  the  TPC-5,
Guam-Filipinos  and China-U.S.  cables.  The  acquisition  will allow Startec to
access a U.S. based  satellite line of sight that extends from Southeast Asia to
Central  Europe.  The purchase  price was  allocated to the net assets  acquired
based  upon the  estimated  fair  value of such  assets,  which  resulted  in an
allocation  of $1 million to goodwill  and $250,000 to a covenant not to compete
agreement. Purchase price allocations have been completed on a preliminary basis
and are subject to adjustment  should new or additional facts about the business
become known.

     In  December  1998,  the Company  acquired  Global  Communications  GmbH of
Germany  ("Global")  for  $5.4  million.   Global  has  a  Class  IV  nationwide
telecommunications  license  for  Germany,  an  interconnection  agreement  with
Deutsche  Telekom and a Siemens EWSD switch located in Dusseldorf.  The purchase
price was allocated to the net assets  acquired  based upon the  estimated  fair
value of




                                       60
<PAGE>


           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED


such  assets,  which  resulted in an  allocation  of $2.5  million to  goodwill.
Purchase price  allocations  have been completed on a preliminary  basis and are
subject to adjustment  should new or additional  facts about the business become
known.

     The Company has accounted for all of the referenced  acquisitions using the
purchase  method.  Accordingly,  the  results  of  operations  of  the  acquired
companies are included in the accompanying consolidated statements of operations
of the Company, as of the date of their respective acquisition.

     The  Company's  summarized,  unaudited  consolidated  pro forma  results of
operations,  assuming the above PCI transaction  occurred on January 1, 1997 are
as follows (in thousands, except per share amounts):


<TABLE>
<CAPTION>
                                                            FOR THE YEAR ENDED
                                                               DECEMBER 31,
                                                      ------------------------------
                                                           1998              1997
                                                      --------------    -------------
<S>                                                    <C>                 <C>    
  Net Revenues......................................     $ 166,195        $ 93,291
  Income (loss) from operations.....................       (11,384)            737
  Income (loss) before extraordinary item...........       (18,655)            480
  Net income........................................       (19,169)            480
  Basic earnings (loss) per common share:
    Income (loss) before extraordinary item.........         (2.08)           0.08
    Net income (loss) per common share..............         (2.14)           0.08
  Diluted earnings (loss) per common share:
    Income (loss) before extraordinary item.........         (2.08)           0.07
    Net income (loss) per common share..............         (2.14)           0.07
</TABLE>

    Operations for Global were not significant for 1998 and 1997.

13. QUARTERLY FINANCIAL 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 (1) and (2) 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>
                                                                                            1998
                                                                     ---------------------------------------------------------
                                                                          FIRST         SECOND         THIRD         FOURTH
                                                                         QUARTER       QUARTER        QUARTER        QUARTER
                                                                     ----------------------------------------------------------
                                                                          (in thousands, except per common share amounts)
<S>                                                                   <C>               <C>           <C>       <C>
 Net revenues (1).........................................               $ 29,891      $ 33,461       $ 47,448       $ 50,369
 Gross margin (1).........................................                  4,236         4,632          5,496          5,629
 Income (loss) from operations............................                    713        (1,166)        (3,282)        (6,921)
 Income (loss) before extraordinary item..................                    899        (2,657)        (6,015)       (10,287)
 Net income (loss)........................................                    899        (2,657)        (6,015)       (10,801)

 Basic earnings (loss) per common share:
  Income (loss) before extraordinary item.................                   0.10         (0.30)         (0.67)         (1.15)
  Net income (loss).......................................                   0.10         (0.30)         (0.67)         (1.21)
  Weighted average common shares
    outstanding-basic......................................                 8,909         8,942          8,964          8,965

 Diluted earnings (loss) per common share:
  Income (loss) before extraordinary item..................                  0.10         (0.30)         (0.67)         (1.15)
  Net income (loss)........................................                  0.10         (0.30)         (0.67)         (1.21)
  Weighted average common and equivalent shares
    outstanding-diluted....................................                 9,365         8,942          8,964          8,965
</TABLE>




                                       61
<PAGE>


          STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED


<TABLE>
<CAPTION>
                                                                                            1997
                                                                     ---------------------------------------------------------
                                                                          FIRST         SECOND         THIRD         FOURTH
                                                                         QUARTER       QUARTER        QUARTER        QUARTER
                                                                     ----------------------------------------------------------
                                                                          (in thousands, except per common share amounts)
<S>                                                                     <C>           <C>            <C>            <C>     
     Net revenues...........................................            $ 12,372      $ 16,464       $ 25,757       $ 31,264
     Gross margin (2).......................................               1,607         1,979          3,089          3,399
     Income from operations.................................                 256           349            738            754
     Net income.............................................                 137           214            413            855   

     Basic earnings per common share:
      Net income.........................................                   0.03          0.04           0.08           0.10
      Weighted average common shares                                   
        outstanding-basic................................                  5,403         5,403          5,403          8,324
                                                                       
     Diluted earnings per common share:                                
      Net income.........................................                   0.03          0.04           0.07           0.10
      Weighted average common and equivalent shares                    
        outstanding-diluted..............................                  5,474         5,646          5,760          8,709
--------------------
</TABLE>

(1)  During the second  quarter of 1998,  upon receipt of  favorable  collection
     data,  the  Company   reduced  its  allowance  for  doubtful   accounts  by
     approximately $337,000.

(2)  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.

14. SUBSEQUENT EVENTS:

     In February 1999, the Company  acquired a 64.6%  ownership in Phone Systems
and Network Inc. of France  ("PSN") for  approximately  $3.8 million in cash and
425,000  shares  of  Startec  common  stock  for a total  consideration  of $7.6
million.  PSN is a facilities  based provider in France,  with switches in Paris
and Switzerland.  PSN also provides  services on a switchless  reseller basis in
Belgium.  Common  shares of PSN are traded on the  Nouveau  Marche  exchange  in
France.

     In February 1999, the Company  acquired a 20% ownership in a Nevada holding
company with  operations in Europe.  The Company was acquired for  approximately
$1.2 million.  Concurrent with the acquisition,  Startec received a $2.5 million
note payable from the company  convertible  at the Company's  option into common
shares equivalent to an additional 28% fully diluted ownership.





                                       62
<PAGE>


          STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED



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 and executive officers required
by 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 by 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 by 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 by 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.  The Exhibits  required to be filed pursuant to Form 10-K are
       identified in the Exhibit Index.

(b)  REPORTS ON FORM 8-K

On December  15,  1998,  the Company  filed a Form 8-K with the  Securities  and
Exchange Commission.




                                       63
<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.

                                 Startec Global Communications Corporation

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

          Pursuant to the  requirements of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

                    STARTEC GLOBAL COMMUNICATIONS CORPORATION

<TABLE>
<CAPTION>
  SIGNATURES                           TITLE                                DATE           
  ----------                           -----                                ----           
                                                                                           
<S>                       <C>                                         <C> 
 /s/ Ram Mukunda          President, Chief Executive Officer,          March 30, 1999      
 ---------------          Treasurer and Director (Principal                                
     Ram Mukunda          Executive Officer)                                               
                                                                                           
 /s/ Prabhav V. Maniyar   Senior Vice President, Chief Financial       March 30, 1999      
----------------------    Officer, Secretary and Director                                  
     Prabhav V. Maniyar   (Principal Financial and Accounting                              
                          Officer)                                                         
                                                                                           
 /s/ Vijay Srinivas       Director                                     March 30, 1999      
-------------------                                                                        
     Vijay Srinivas                                                                           
                                                                                           
/s/ Nazir G. Dossani      Director                                     March 30, 1999      
--------------------                                                                       
    Nazir G. Dossani                                                                         
                                                                                           
/s/ Richard K. Prins      Director                                     March 30, 1999      
-------------------                                                                        
    Richard K. Prins                                                                          
                                                                      
</TABLE>

                                      


<PAGE>




                                  EXHIBIT INDEX

EXHIBIT
NUMBER           DESCRIPTION                                                PAGE

2.1****          Agreement and Plan of Reorganization dated June 30, 1998 by and
                 between Startec Global  Communications  Corporation and Startec
                 Global Holding Corporation
2.2####          Stock Purchase  Agreement  dated as of November 30, 1998 by and
                 between the Company and Pacific Systems Corporation
2.3              Quota  Purchase  Agreement by and between Martin Otten and Rolf
                 Otten,  on the one part,  and the  Company,  on the other part,
                 effective as of December 31, 1998.
3.1****          Restated Certificate of Incorporation.
3.2****          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.
4.5***           Indenture,  dated as of May 21,  1998,  between the Company and
                 First Union National Bank.
4.6***           Form of 12% Series A Senior Notes due 2008
4.7***           Registration Rights Agreement,  dated as of May 21, 1998, among
                 the Company, Lehman  Brothers Inc., Goldman Sachs & Co. and ING
                 Barings (U.S.) Securities, Inc.
4.8***           Warrant Agreement,  dated as of May 21, 1998 by and between the
                 Company and First Union National Bank, a Warrant Agent
4.9***           Form of Warrant (included as Exhibit A to Exhibit 4.8)
4.10***          Collateral Pledge and Security  Agreement,  dated as of May 21,
                 1998 by and between the Company and First Union  National Bank,
                 as Trustee
4.11**           Rights  Agreement,  dated as of March  26,  1998,  between  the
                 Company and Continental Stock Transfer & Trust Company.
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 Mukunda.
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


<PAGE>



                 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.
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.
10.21***         Agreement by and between Northern Telecom Inc. and the Company,
                 dated as of December 23, 1997
10.22***         Indefeasible  Right of Use Agreement by and between  Telegloble
                 Cantat-3,  Inc. and the Company, dated as of September 15, 1997
                 (Canus 1 Cable System).
10.23***         Indefeasible  Right of Use  Agreement by and between  Teleglobe
                 Cantat-3,  Inc. and the Company, dated as of September 15, 1997
                 (Cantat 3 Cable System).
10.24#           Loan and Security  Agreement by and between  Prabhav V. Maniyar
                 and the Company, dated June 30, 1998 (as amended and related by
                 agreement dated December 31, 1998. See Exhibit 10.41 below).
10.25#           Lease by and  between  The Vaswani  Place  Corporation  and the
                 Company, dated as of October 27, 1998.
10.26#           Indefeasible  Right of Use  Agreement  by and  between  Cable &
                 Wireless Inc. and the Company, dated June 9, 1998 (Gemini Cable
                 System)
10.27#           First  Amendment  to Lease by and  between  The  Vaswani  Place
                 Corporation and the Company, dated May 11, 1998.
10.28#           International Facilities License, United Kingdom
10.29##          Columbus  III  Cable  System   Construction   and   Maintenance
                 Agreement dated February 11, 1998.
10.30###         TAT-14 Cable Network  Construction  and  Maintenance  Agreement
                 dated as of September 2, 1998.
10.31###         SEA-ME-WE  Construction  and Maintenance  Agreement dated as of
                 January 1, 1997.
10.32###         Amendment  dated  as of July 8,  1998  by and  between  Cable &
                 Wireless, Inc. and the Company to the Indefeasible Right of Use
                 Agreement, dated as of June 9, 1998 (Gemini Cable System).
10.33###         Rack Space Agreement by and between Americatel  Corporation and
                 the Company, dated as of July 27, 1998.
10.34###         Rack Space  Agreement by and between IXC Carrier,  Inc. and the
                 Company, dated as of July 6, 1998 (Los Angeles).
10.35###         Rack Space  Agreement by and between IXC Carrier,  Inc. and the
                 Company, dated as of August 19, 1998 (Dallas).
10.36###         Co-Location Agreement by and between Espirit Telecom Benelux BV
                 and the Company., dated as of September 21, 1998
10.37###         Sublease  Agreement  by  and  between   Information  Systems  &
                 Networks, Inc. and the Company dated as of August 11, 1998.
10.38###         Master  Supply  Agreement  by and  between  TTN,  Inc.  and the
                 Company dated as of September 21, 1998.
10.39            Loan  and  Security  Agreement  by  and  between  NTFC  Capital
                 Corporation and the Company, dated as of December 31, 1998.
10.40            Loan and Security  Agreement by and between Ram Mukunda and the
                 Company, dated as of October 8, 1998.
10.41            Loan and Security  Agreement by and between  Prabhav V. Maniyar
                 and the Company, dated as of December 31, 1998.
10.42            TPC-5 Cable Network IRU Agreement between Companhia  Portuguesa
                 Radio Marconi, SA and the Company, dated December 15, 1998.
10.43            TPC-5 Cable Network Indefeasible Right of Use Agreement between
                 KDD Corporation and the Company dated  December 31, 1998.
10.44            TAT-12/13  Cable  Network  IRU  Agreement   between   Companhia
                 Portuguesa  Radio Marconi,  SA and the Company,  dated December
                 15, 1998.
10.45            Lease  between  36 North  East  Second  Street,  L.L.C  and the
                 Company executed on November 30, 1998.
10.46            Lease  between  36 North  East  Second  Street,  L.L.C  and the
                 Company executed on October 29, 1998
21.1             Subsidiaries of Company.


<PAGE>


23.1            Consent of Arthur Andersen LLP.
27.1            Financial Data Schedule.

----------
*       Incorporated by reference from the Company's  Registration  Statement on
        Form S-1 (SEC File No. 333-32753).
**      Incorporated by reference from the Company's  Current Report on Form 8-K
        filed on April 8, 1998
***     Incorporated by reference from the Company's  Quarterly Report on Form 1
        0-Q for the quarter ended June 30, 1998
****    Incorporated by reference from the Company's  Registration  Statement on
        Form S-4 (SEC File No. 333-58247)
#       Incorporated by reference from the Company's  Registration  Statement on
        Form S-4 (SEC File No. 333-61779)
##      Incorporated by reference from the Company's  Registration  Statement on
        Form S-1 (SEC File No. 333-64465)
###     Incorporated  by reference from the Company's  Quarterly  Report on Form
        10-Q for the quarter ended September 30, 1998.
####    Incorporated  by reference  from the  Company's  Current  Report on Form
        8-K/A filed on February 12, 1999.
+       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.


<PAGE>





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

    To Startec Global Communications Corporation:

          We have  audited,  in  accordance  with  generally  accepted  auditing
standards,   the   consolidated   financial   statements   of   Startec   Global
Communications Corporation and subsidiaries (a Maryland corporation) included in
this Form 10-K and have issued our report  thereon dated  February 23, 1999. 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  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.
February 23,  1999





                                      

<PAGE>



           STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                        ADDITIONS
                                                                --------------------------- 
                                                                 CHARGED TO      CHARGED TO      
                                                   BEGINNING      COSTS AND        OTHER           ENDING
                         DESCRIPTION                BALANCE      EXPENSES(A)     ACCOUNTS(B)     DEDUCTIONS(C)      BALANCE
                                                   ----------   -------------   --------------  ----------------  -------------
 Reflected as reductions to the related assets:
   Provisions for uncollectible accounts
  (deductions from trade accounts receivable)

<S>                                                 <C>             <C>             <C>             <C>              <C>     
 Year ended December 31, 1996.                      $   457         $   783         $    464        $    (625)       $  1,079
 Year ended December 31, 1997.                        1,079              57            1,864             (647)          2,353
 Year ended December 31, 1998.                        2,353             329              827             (850)          2,659

</TABLE>

(a)  Includes $329,000 of reserves recognized in purchase accounting in 1998.
(b)  Represents a reduction of residential revenue not expected to be realized.
(c)  Represents amounts written off as uncollectible.

                                      S-1