Telegroup Inc – ‘S-1’ on 12/22/97

As of:  Monday, 12/22/97   ·   Accession #:  928385-97-2089   ·   File #:  333-42965

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Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1         Registration Statement (General Form)                179   1.12M 
 2: EX-1.1      Exhibit 1.1 -- Purchase Agreement                     33    112K 
 3: EX-10.14    Exhibit 10.14 -- Reg. Rights Agreement                16     93K 
 4: EX-23.1     Exhibit 23.1 -- Consent of Kpmg Peat Marwick           1      5K 
 5: EX-23.2     Exhibit 23.2 -- Consent of Macintyre & Co.             1      5K 
 6: EX-27.1     Exhibit 27.1 -- Financial Data Schedule                2      6K 

S-1   —   Registration Statement (General Form)
Document Table of Contents

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1997 

                                                   REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION  
WASHINGTON, D.C. 20549  
---------------   
FORM S-1  
REGISTRATION STATEMENT  
UNDER 
THE SECURITIES ACT OF 1933  
---------------   
TELEGROUP, INC. 
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)  

  IOWA                            4813                  42-1344121
(STATE OR OTHER JURISDICTION     (PRIMARY STANDARD        (I.R.S. EMPLOYER  
OF INCORPORATION OR ORGANIZATION)     INDUSTRIAL         IDENTIFICATION NUMBER) 
       CLASSIFICATION CODE
       NUMBER)
---------------   
2098 NUTMEG AVENUE  
FAIRFIELD, IOWA 52556 
(515) 472-5000  
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF 
REGISTRANT'S PRINCIPAL EXECUTIVE PRINCIPAL OFFICES) 

DOUGLAS A. NEISH  
CHIEF FINANCIAL OFFICER 
TELEGROUP, INC. 
2098 NUTMEG AVENUE  
FAIRFIELD, IOWA 52556 
(515) 472-5000  
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,  
OF AGENT FOR SERVICE) 
---------------   
COPIES TO:  
MORRIS F. DEFEO, JR., ESQ.  
EDSEL J. GUYDON, ESQ. 
SWIDLER & BERLIN, CHARTERED 
3000 K STREET, N.W., SUITE 300  
WASHINGTON, D.C. 20007  
(202) 424-7500; FACSIMILE (202) 424-7647  
---------------   
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as 
practicable after the effective date of this Registration Statement.            
If any of the securities being registered on this Form are to be offered on 
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of  
1933, check the following box: [X]                                              
If this Form is filed to register additional securities for an offering     
pursuant to Rule 462(b) under the Securities Act, please check the following    
box and list the Securities Act registration statement number of the earlier    
effective registration statement for the same offering: [_]                     
If this Form is a post-effective amendment filed pursuant to Rule 462(c)    
under the Securities Act, check the following box and list the Securities Act   
registration statement number of the earlier effective registration statement   
for the same offering: [_]                                                      
If delivery of the prospectus is expected to be made pursuant to Rule 434,  
please check the following box: [_]                                             
CALCULATION OF REGISTRATION FEE 

                                                                [Download Table]

================================================================================
                                                     PROPOSED                   
                                       PROPOSED       MAXIMUM                   
 TITLE OF EACH CLASS OF    AMOUNT      MAXIMUM       AGGREGATE                  
    SECURITIES TO BE       TO BE    OFFERING PRICE   OFFERING      AMOUNT OF    
       REGISTERED        REGISTERED  PER SHARE(1)    PRICE(1)    REGISTERED FEE 
------------------------------------------------------------------------------- 
                                                                                
Common Stock, No par                                                            
 value(2)(3) ..........   234,889      $12.9375    $3,038,876.44    $920.87     
------------------------------------------------------------------------------- 
Warrants(3)............      5          $0.01          $0.05         $0.01      
------------------------------------------------------------------------------- 
TOTAL..................                                             $920.88     
================================================================================

(1) Estimated solely for purposes of calculating the registration fee. In       
 accordance with Rule 457(c) of Regulation C, the estimated price for such
  shares was based on the average of the high and low reported prices on the
Nasdaq National Market System on December 17, 1997.                     
(2) Includes: (i) 23,188 shares which are reserved for issuance pursuant to     
  currently issued and outstanding Convertible Subordinated Notes which will
be offered for resale by certain Selling Shareholders, and (ii) 211,701 
shares of Common Stock issuable upon exercise of the Warrants (the      
"Warrants").                                                            
(3) Pursuant to Rule 416, this Registration Statement also covers such          
indeterminate number of shares of Common Stock as may be issuable upon  
exercise of the referenced Warrants pursuant to antidilution provisions.
--------------- 
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR    
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT      
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS              
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH     
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION           
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE    
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.                

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A       
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE     
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY    
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES  
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE         
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE            
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE      
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF    
ANY SUCH STATE.                                                                 

================================================================================

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 22, 1997

PROSPECTUS                                                                      

234,899 SHARES

[LOGO OF TELEGROUP APPEARS HERE]  

COMMON STOCK
THE DATE OF THIS PROSPECTUS IS    , 1998. 

The 234,899 shares of Common Stock, no par value (the "Common Stock"), are  
offered hereby, of Telegroup, Inc. (the "Company") subject to issuance upon     
conversion of certain Convertible Subordinated Notes (the "Notes") of the       
Company owned by certain selling securityholders (the "Selling Shareholders"),  
which may be sold from time to time, by the Selling Shareholders for their own  
accounts. The Company has been advised that the Selling Shareholders may from   
time to time sell the shares to or through brokers or dealers in one or more    
transactions, on the Nasdaq National Market System (the "Nasdaq NMS") or        
otherwise, at market prices prevailing at the time of sale, at prices relating  
to such prevailing market prices, or at negotiated prices. The Warrants offered 
hereby are exercisable at any time prior to November 28, 2003. The Warrants are 
entitled to certain antidilution protection in the event of additional          
issuances of Common Stock, stock splits, stock dividends, reorganizations and   
other similar events. The shares of Common Stock issued pursuant to the         
exercise of the Warrants are entitled to certain registration rights described  
herein.                                                                         

 The Company's Common Stock is listed on the Nasdaq NMS under the symbol TGRP.
On December 17, 1997, the last reported sale price of Common Stock, as reported 
on the Nasdaq NMS, was $12.9375 per share.                                      

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

SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR A DISCUSSION   
OF RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF  
THE SHARES OF COMMON STOCK OFFERED HEREBY.  

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

THESE SECURITIES HAVE NOT BEEN APPROVED  OR DISAPPROVED BY THE SECURITIES AND 
EXCHANGE  COMMISSION  OR  ANY  STATE  SECURITIES  COMMISSION  NOR  HAS  THE 
SECURITIES AND EXCHANGE  COMMISSION OR ANY  STATE SECURITIES  COMMISSION
PASSED  UPON  THE  ACCURACY  OR  ADEQUACY  OF  THIS  PROSPECTUS.  ANY 
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.               

Since the Common Stock registered hereunder is being offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as      
amended (the "Act"), the Company cannot include herein information about the    
price to the public of the Common Stock or the proceeds to the Selling          
Shareholders. The Company will receive no proceeds from any sales of Common     
Stock by the Selling Shareholders, and the Company is obligated to pay the      
expenses of this offering, which are estimated at $   . The Selling             
Shareholders will pay their own expenses in connection with sales of the Common 
Stock. The Selling Shareholders and any brokers or dealers executing selling    
orders on their behalf may be deemed "underwriters" within the meaning of the   
Act, in which event the usual and customary selling commissions which may be    
paid to the brokers or dealers may be deemed to be underwriting commissions     
under the Act. There can be no assurance that any or all of the Shares          
registered hereunder will be sold. See "Plan of Distribution."                  

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AVAILABLE INFORMATION 

The Company has filed with the Commission a Registration Statement on Form  
S-4 (the "Exchange Offer Registration Statement") under the Securities Act      
with respect to the Exchange Notes being offered by this Prospectus. This       
Prospectus does not contain all the information set forth in the Exchange       
Offer Registration Statement and the exhibits and schedule thereto, certain     
portions of which have been omitted pursuant to the rules and regulations of    
the Commission. Statements made in this Prospectus as to the contents of any    
contract, agreement or other document are not necessarily complete. With        
respect to each such contract, agreement or other document filed or             
incorporated by reference as an exhibit to the Exchange Offer Registration      
Statement, reference is made to such exhibit for a more complete description    
of the matter involved, and each such statement is qualified in its entirety    
by such reference.                                                              

The Company is subject to the periodic reporting and other informational    
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange  
Act"), and in accordance therewith files reports and other information with     
the Commission. The Exchange Offer Registration Statement and reports, and      
other information filed by the Company can be inspected and copied at the       
public reference facilities maintained by the Commission at Room 1024, 450      
Fifth Street, N.W., Washington, D.C. 20549; Suite 1400, 500 West Madison        
Street, Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor, New  
York, New York 10048. Copies of such material can be obtained by mail from the  
Public Reference Section of the Commission, 450 Fifth Street, N.W.,             
Washington, D.C. 20549, at prescribed fees. The Commission also maintains a     
website that contains reports, proxy and information statements and other       
information. The website address is http://www.sec.gov. Under the terms of the  
Indenture (as defined herein) pursuant to which the Old Notes were, and the     
Exchange Notes will be, issued, the Company will be required to file with the   
Commission, and to furnish holders of the Notes with, the information,          
documents and other reports specified in Sections 13 and 15(d) of the Exchange  
Act, including reports on Forms 10-K, 10-Q and 8-K.                             

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS 

This Prospectus contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and            
information relating to the Company that is based on the beliefs of the         
Management of the Company, as well as assumptions made by and information       
currently available to the Management of the Company. When used in this         
Prospectus, the words "estimate," "project," "believe," "anticipate,"           
"intend," "expect" and similar expressions are intended to identify forward-    
looking statements. Such statements reflect the current views of the Company    
with respect to future events and are subject to risks an uncertainties that    
could cause actual results to differ materially from those contemplated in      
such forward-looking statements, including those discussed under "Risk          
Factors." Readers are cautioned not to place undue reliance on these forward-   
looking statements, which speak only as of the date hereof. The Company does    
not undertake any obligation to publicly release any revisions to these         
forward-looking statements to reflect events or circumstances after the date    
hereof or to reflect the occurrence of unanticipated events.                    

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed     
information, including risk factors, the Company's consolidated financial       
statements and other financial data, appearing elsewhere in this Prospectus.    
References in this Prospectus to the "Company" and "Telegroup" refer to         
Telegroup, Inc. and its Subsidiaries (as defined), except where the context     
otherwise requires. See "Glossary of Terms" for definitions of certain          
technical and other terms used in this Prospectus.                              

THE COMPANY 

Telegroup is a leading global provider of long distance telecommunications  
services. The Company offers a broad range of discounted international,         
national, value-added wholesale and enhanced telecommunications services to     
approximately 268,000 small and medium-sized business, residential and          
wholesale customers in over 180 countries worldwide. Telegroup has achieved its 
significant international market penetration by developing what it believes to  
be one of the most comprehensive global sales, marketing and customer service   
organizations in the global telecommunications industry. The Company operates a 
reliable, flexible, cost-effective, digital, facilities-based network (the      
"Telegroup Intelligent Global Network" or "TIGN") consisting of 19 Excel,       
NorTel or Harris switches, five enhanced services platforms, owned and leased   
capacity on seven digital fiber-optic cable links, leased parallel data         
capacity and the Company's Network Operations Center in Fairfield, Iowa.        
According to Federal Communications Commission ("FCC") statistics based on 1996 
revenue, Telegroup was the thirteenth largest U.S. long distance carrier in     
1996.                                                                           

Telegroup provides an extensive range of telecommunications services on a   
global basis under the Spectra, Global Access and other brand names. The        
Company's services are typically priced competitively with other alternative    
telecommunications providers and below the prices offered by the incumbent      
telecommunications operators ("ITOs"), which are often government-owned or      
protected telephone companies. While the Company offers a broad range of        
telecommunications services, the services offered in a particular market vary   
depending upon regulatory constraints and local market demands. Telegroup       
historically has offered traditional call-reorigination service (also known as  
"callback") to penetrate international markets having regulatory constraints.   
As major markets continue to deregulate, the Company continues to migrate an    
increasing portion of its customer base to "call-through" service, which        
includes conventional international long distance service and a "transparent"   
form of call-reorigination. The Company markets its call-through service under  
the brand name Global Access Direct and its traditional call-reorigination      
service under the brand name Global Access CallBack. Currently, the Company     
offers both international and national long distance service, prepaid and       
postpaid calling cards, toll-free service and enhanced services such as fax     
store and forward, fax-mail, voice-mail and call conferencing. The Company      
believes its broad array of basic and enhanced services enables the Company to  
offer a comprehensive bundled solution to its customers' telecommunications     
needs. The Company also resells switched minutes and enhanced service platforms 
on a wholesale basis to other telecommunications providers and carriers. See    
"Business--Services."                                                           

Telegroup's extensive sales, marketing and customer service organization    
consists of a worldwide network of independent agents and an internal sales     
force who market Telegroup's services and provide customer service, typically   
in local languages and in accordance with the cultural norms of the countries   
and regions in which they operate. The Company's local sales, marketing and     
customer service organization permits the Company to continually monitor        
changes in each market and quickly modify service and sales strategies in       
response to changes in particular markets. In addition, the Company believes    
that it can leverage its global sales and marketing organization to quickly and 
efficiently market new and innovative service offerings. As of November 30,     
1997, the Company had approximately 1,375 independent agents worldwide. Twenty- 
eight country coordinators ("Country Coordinators") are responsible for         
coordinating Telegroup's operations, including sales, marketing, customer       
service and independent agent support, in 72 countries. In addition, the        
Company has 31 internal sales personnel in the United States and one each in    
France, Germany and the United Kingdom, and                                     

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intends to establish additional internal sales departments in selected core     
markets. The Company believes that its comprehensive global sales, marketing    
and customer service organization will enable the Company to increase its       
market share and position itself as the leading alternative international long  
distance provider in each of its target markets. The Company believes that it   
is the largest alternative international long distance provider in three of the 
largest international telecommunications markets in the world--France, the      
Netherlands and Switzerland. See "Business--Sales, Marketing and Customer       
Service."                                                                       

The Telegroup Intelligent Global Network includes a central Network         
Operations Center ("Network Operations Center") in Iowa City, Iowa, as well as  
switches, owned and leased transmission capacity and a proprietary distributed  
intelligent network architecture. The TIGN is designed to allow customer-       
specific information, such as credit limits, language selection, waiting voice- 
mail and faxes, and speed dial numbers to be distributed efficiently over a     
parallel data network wherever Telegroup has installed a TIGN switch. In        
addition, the open, programmable architecture of the TIGN allows the Company to 
rapidly deploy new features, improve service quality, and reduce costs through  
least cost routing. As of September 30, 1997, the TIGN consisted of (i) the     
Network Operations Center, (ii) 19 Excel, NorTel or Harris switches in New York 
City, Jersey City, New Jersey, London, Paris, Amsterdam, Zurich, Copenhagen,    
Frankfurt, Hong Kong, Sydney, Tokyo and Milan (iii) five enhanced services      
platforms in New York, Hong Kong, London, Paris and Sydney, (iv) owned and      
leased fiber-optic cable links connecting its New York and New Jersey switches  
to its switches in London, Amsterdam, Sydney and Los Angeles, and its London    
switches to its switches in Paris and Amsterdam, and (v) leased parallel data   
transmission capacity connecting Telegroup's switches to each other and to the  
networks of other international and national carriers. The Company intends to   
further develop the TIGN by upgrading existing facilities and by adding         
switches and transmission capacity principally in and between major markets     
where the Company has established a substantial customer base. See "Business--  
Network and Operations."                                                        

MARKET OPPORTUNITY                                                              

 The global market for national and international telecommunications equipment
and services is undergoing significant deregulation and reform. The industry is 
being shaped by the following trends: (i) deregulation and privatization of     
telecommunications markets worldwide; (ii) diversification of services through  
technological innovation; and (iii) globalization of major carriers through     
market expansion, consolidation and strategic alliances. As a result of these   
factors, it is anticipated that the industry will experience considerable       
growth in the foreseeable future, both in terms of traffic volume and revenue.  
According to the International Telecommunications Union ("ITU"), a worldwide    
telecommunications organization under the auspices of the United Nations, the   
1998 revenues of the global telecommunications industry is projected to exceed  
$1 trillion. The international telecommunications industry accounted for $52.8  
billion in revenues and 60.3 billion minutes of use in 1995, increasing from    
$21.7 billion in revenues and 16.7 billion minutes of use in 1986, which        
represents compound annual growth rates of 10% and 15%, respectively. The ITU   
projects that global telecommunications services revenues will approach $900    
billion by the year 2000. See "The Global Telecommunications Industry."         

BUSINESS STRATEGY                                                               

 Telegroup's objective is to become the leading provider of telecommunications
services to small and medium-sized business and high-volume residential         
customers in its existing core markets and in selected target markets.          
Telegroup's strategy for achieving this objective is to deliver additional      
services to customers in its markets through the continued deployment of the    
TIGN and to expand its sales and marketing organization into new target         
markets. The Company's business strategy includes the following key elements:   

Expand the Telegroup Intelligent Global Network. Telegroup is currently     
expanding the TIGN by installing additional switches, purchasing ownership in   
additional fiber-optic cable and leasing additional dedicated transmission      
capacity in strategically located areas of customer concentration in Western    
Europe and                                                                      

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the Pacific Rim. Through September 30, 1997, the Company has invested over      
$16.2 million in network facilities, and the Company anticipates the investment 
of an additional $40.3 million in network facilities over the next 15 months.   
During the next 15 months, the Company has scheduled the installation of        
additional switches in the United States, Spain, New Zealand, Korea, El         
Salvador and Brazil, and nodes in the United States, Sweden, Norway, Belgium,   
Greece and Austria. Telegroup will continue to purchase ownership in additional 
fiber-optic cables and lease additional dedicated transmission capacity to      
reduce the Company's per minute transmission costs. The Company's ability to    
achieve these goals is dependent upon, among other things, its ability to raise 
additional capital. The Company believes that the expansion of the TIGN will    
enable Telegroup to continue to migrate customers from traditional call-        
reorigination services to Global Access Direct. In order to maximize the        
Company's return on invested capital, the Company employs a success-based       
approach to capital expenditures, locating new switching facilities in markets  
where the Company has established a customer base by marketing its call-        
reorigination services.                                                         

Maximize Operating Efficiencies. Telegroup intends to reduce its costs of   
providing telecommunications services by strategically deploying switching      
facilities, adding leased and owned fiber-optic capacity and entering into      
additional alternative "transit/termination agreements." This expansion of the  
TIGN will enable the Company to originate, transport and terminate a larger     
portion of its traffic over its own network, thereby reducing its overall       
telecommunications costs. The Company believes that through least cost routing  
and its cost effective Excel LNX switches and its other facilities, Telegroup   
will be able to further reduce the overall cost of its services.                

 Expand Global Sales, Marketing and Customer Service Organization. The Company
believes that its experience in establishing one of the most comprehensive      
global sales, marketing and customer service organizations in the global        
telecommunications industry provides it with a competitive advantage. The       
Company intends to expand its global sales, marketing and customer service      
organization in new and existing markets. In new target markets, the Company    
relies primarily on independent agents to develop a customer base while         
minimizing its capital investment and management requirements. As the customer  
base in a particular market develops, the Company intends to selectively        
acquire the operations of its Country Coordinator serving such market and       
recruit and train additional internal sales personnel and independent agents.   
The Company believes that a direct sales and marketing organization complements 
its existing independent agents by enabling Telegroup to conduct test marketing 
and quickly implement new marketing strategies. In addition to its sales        
offices in France, Germany and the United Kingdom, the Company intends to open  
or acquire additional offices in target markets in Europe and the Pacific Rim   
during 1998.                                                                    

Position Telegroup as a Local Provider of Global Telecommunications         
Services. Telegroup is one of the only alternative telecommunications providers 
that offers in-country and regional customer service offices in major markets   
on a global basis. At November 30, 1997, the Company had 28 Country             
Coordinators providing customer service in 72 countries. Telegroup believes     
this local presence provides an important competitive advantage, allowing the   
Company to tailor customer service and marketing to meet the specific needs of  
its customers in a particular market. Customer service representatives speak    
the local languages and are aware of the cultural norms in the countries in     
which they operate. The Company continually monitors changes in the local       
market and seeks to quickly modify service and sales strategies in response to  
such changes. In many instances, this type of dedicated customer service and    
marketing is not available to the Company's target customer base from the ITOs. 

Target Small and Medium-Sized Business Customers. The Company believes that 
small and medium-sized business customers focus principally on obtaining        
quality and breadth of service at low prices and have historically been         
underserved by the ITOs and the major global telecommunications carriers.       
Through the deployment of the TIGN, the Company will continue to migrate        
existing customers from traditional call-reorigination services to Global       
Access Direct, and to address the telecommunications needs of a wider base of   

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small and medium-sized business customers. Telegroup believes that, with its    
direct, face-to-face sales force and dedicated customer service, it can more    
effectively attract and serve these business customers.                         

Pursue Acquisitions, Joint Ventures and Strategic Alliances. The Company    
intends to expand its global sales, marketing and customer service              
organizations, increase its customer base, add network and circuit capacity,    
enter additional markets and develop new products and services through          
acquisitions, joint ventures and strategic alliances. The Company seeks to      
acquire controlling interests in companies that have established marketing      
organizations, existing customer bases, complementary network facilities, new   
services or technologies and experienced management teams. In addition, the     
Company intends to make selective acquisitions of its Country Coordinators'     
operations, in order to lower its selling, general and administrative expense   
and increase control over this distribution channel. The Company also expects   
to acquire the operations of other agents and marketing groups. The Company     
also intends to enter into joint ventures and strategic alliances with selected 
business partners to enable the Company to enter additional markets and to      
complement the Company's current operations and service offerings. The Company  
is continuously reviewing opportunities and believes that such acquisitions,    
joint ventures and strategic alliances are an important means of expanding its  
network and increasing network traffic volume, both of which are expected to    
lower its overall cost of telecommunications services.                          

Broaden Market Penetration through Enhanced Service Offerings. The Company  
believes that offering a broad array of enhanced services is essential to       
retain existing customers and to attract new customers. The TIGN's enhanced     
services platform and its distributed intelligent network architecture permit   
the Company to provide a broad array of voice, data and enhanced services and   
to efficiently distribute customer information, such as language selection,     
waiting voice-mail and faxes and speed dial numbers throughout the TIGN. The    
Company offers a comprehensive solution to its customers' telecommunications    
needs by providing enhanced services, including fax store and forward, fax-     
mail, voice-mail and call conferencing and intends to introduce e-mail-to-      
voice-mail translation and voice recognition services. Telegroup believes that  
its provision of such enhanced services will enable it to increase its revenue  
from existing customers and to attract a broader base of small and medium-sized 
business customers.                                                             

The Company was incorporated in Iowa in 1989. The address of the Company's  
principal place of business is 2098 Nutmeg Avenue, Fairfield, Iowa 52556, and   
its telephone number is (515) 472-5000.                                         

RECENT DEVELOPMENTS 

On July 14, 1997, the Company completed the initial public offering (the    
"IPO") of 4,000,000 shares of Common Stock, no par value (the "Common Stock"),  
at a price of $10.00 per share. The net proceeds to the Company from the sale   
of the 4,000,000 shares was approximately $35.6 million after deducting         
expenses and underwriting discounts. In addition, on August 12, 1997, the       
Company completed the sale of an additional 450,000 shares of Common Stock      
pursuant to the exercise of the underwriters' overallotment option, yielding    
net proceeds to the Company of approximately $4.2 million after deducting       
underwriting discounts.                                                         

On August 14, 1997, the Company acquired 60% of the common stock of, and a  
controlling interest in, PCS Telecom, Inc. ("PCS Telecom") for approximately    
$1.3 million in cash and 40,000 shares of unregistered Common Stock. PCS        
Telecom is a developer and manufacturer of state of the art, feature-rich,      
calling card platforms used by Telegroup and numerous other companies. PCS      
Telecom, which currently has 25 employees, has installed its products both in   
international and domestic markets. Telegroup has purchased these platforms as  
part of its global strategy of providing enhanced services for the TIGN, and    
considers this acquisition to be a strategic purchase which is intended to      
ensure stability of supply of platforms to establish expeditiously an           
international facilities network for enhanced services.                         

On September 5, 1997, the Company prepaid in full all of its outstanding $20
million in aggregate principal amount of 12% Senior Subordinated Notes due 2003 
(the "Senior Subordinated Notes") at a redemption price                         

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equal to 107% of the principal amount thereof, plus accrued interest. The       
Company financed the prepayment of the Senior Subordinated Notes with a portion 
of the net proceeds from the IPO and $8.5 million of borrowings under a $15     
million revolving credit facility with First Chicago NBD, Inc. (the "Revolving  
Credit Facility"). The Revolving Credit Facility expired on October 31, 1997.   
The Company currently anticipates entering into a new credit facility for       
available borrowings in an amount not expected to exceed $20 million with a     
bank or other financial institution (the "New Credit Facility"). There can be   
no assurance that the Company will enter into the New Credit Facility.          

On September 30, 1997, the Company issued $25 million aggregate principal   
amount of 8% Convertible Subordinated Notes due 2005 (the "Convertible Notes"). 
The net proceeds to the Company from the issuance of the Convertible Notes was  
approximately $24.3 million and approximately $15.0 million of such net         
proceeds were used to repay all amounts outstanding under the Revolving Credit  
Facility. See "Description of Other Indebtedness."                              

On October 23, 1997, the Company consummated a private placement under Rule 
144A of the Securities Act, pursuant to which the Company issued and sold $97   
million aggregate principal amount at maturity of Senior Discount Notes (the    
"Senior Discount Notes"), receiving gross proceeds of approximately $72.3       
million. The Senior Discount Notes were issued pursuant to the terms of an      
indenture dated October 23, 1997 (the "Indenture") between the Company and      
State Street Bank and Trust Company, as trustee (the "Trustee").                

On November 25, 1997, the Company acquired certain property and equipment   
from Fastnet UK Limited ("Fastnet") for approximately $240,000. Fastnet has an  
agency agreement with the Company in which it coordinated retail sales and      
provided customer service and other services to the Company's customers in the  
United Kingdom. The Company intends to utilize the assets acquired to enhance   
the operations of Telegroup UK Limited, a wholly-owned subsidiary of the        
Company.                                                                        

THE OFFERING

Common Stock offered by                                                         
the Selling Shareholders   Up to 234,889 shares of Common Stock. See          
.........................  "Description of Common Stock."                     

Common Stock outstanding                                                        
before offering (1) .....  30,768,542 shares                                  

Common Stock to be                                                              
outstanding after the      31,003,431 shares                                  
Offering (2) ............                                                     

Use of proceeds ..........  The Company will not receive any of the proceeds    
                    from the sale of Common Stock by the Selling
Shareholders.           

Dividend policy ..........  The Company does not expect to pay dividends on the 
                   Common Stock in the foreseeable future. See
"Dividend Policy."      

Nasdaq National Market      TRGP                                                
Symbol ..................                                                     
--------                                                                        
(1) As of September 30, 1997, excludes (i) 1,677,153 shares of Common Stock     
 issuable upon the exercise of options granted under the Stock Option Plan
(as defined); (ii) 2,322,847 shares of Common Stock issuable upon the   
exercise of options available for grant under the Stock Option Plan; and
(iii) 1,160,107 shares of Common Stock issuable upon the exercise of the
 Warrants (as defined). See "Management--Amended and Restated Stock Option
Plan" and "Description of Capital Stock--Warrants."                     
(2) Assumes that all of the Convertible Subordinated Notes are converted at a   
conversion rate of $12 per share. See "Description of Securities."      

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SUMMARY FINANCIAL DATA

 The following table sets forth certain consolidated financial information for
the Company for (i) the years ended December 31, 1994, 1995 and 1996, which     
have been derived from the Company's audited consolidated financial statements  
and notes thereto included elsewhere in this Prospectus, (ii) the year ended    
December 31, 1993, which has been derived from audited consolidated financial   
statements of the Company which are not included herein, and (iii) the year     
ended December 31, 1992, which has been derived from unaudited consolidated     
financial statements which are not included herein. The summary financial data  
as of September 30, 1997 and for the nine months ended September 30, 1996 and   
1997 has been derived from the unaudited consolidated financial statements for  
the Company included elsewhere in this Prospectus. In the opinion of            
management, the unaudited consolidated financial statements have been prepared  
on the same basis as the audited consolidated financial statements and include  
all adjustments, which consist only of normal recurring adjustments, necessary  
for a fair presentation of the financial position and the results of operations 
for these periods. The "As Adjusted" financial information is not necessarily   
indicative of the Company's financial position or the results of operations     
that actually would have occurred if the transactions described herein had      
occurred on the dates indicated or for any future period or date. The           
adjustments give effect to available information and assumptions that the       
Company believes are reasonable. The following financial information should be  
read in conjunction with "Selected Financial Data" and "Management's Discussion 
and Analysis of Financial Condition and Results of Operations" and the          
Company's consolidated financial statements and notes thereto appearing         
elsewhere herein.                                                               

                                                        [Enlarge/Download Table]

                                                                               YEAR                         NINE MONTHS 
                                                                              ENDED        NINE MONTHS         ENDED    
                                                                           DECEMBER 31,       ENDED        SEPTEMBER 30,
                                     YEAR ENDED DECEMBER 31,               AS ADJUSTED    SEPTEMBER 30,     AS ADJUSTED 
                          -----------------------------------------------  ------------ -----------------  -------------
                             1992      1993     1994      1995     1996      1996(1)      1996     1997       1997(2)   
                          ----------- -------  -------  -------- --------  ------------ -------- --------  -------------
                          (UNAUDITED)                                                      (UNAUDITED)                  
                                            (IN THOUSANDS, EXCEPT RATIOS AND OTHER OPERATING DATA)                      
                                                                                                                        
STATEMENT OF OPERATIONS DATA:                                                                                           
Revenues:                                                                                                               
 Retail.................    $23,846   $29,790  $68,714  $128,139 $179,147    $179,147   $128,828 $169,720    $169,720   
 Wholesale..............        --        --       --        980   34,061      34,061     18,951   68,758      68,758   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
 Total revenues.........     23,846    29,790   68,714   129,119  213,208     213,208    147,779  238,478     238,478   
Cost of revenues........     18,411    22,727   49,513    83,101  150,537     150,537    100,794  174,273     174,273   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
 Gross profit...........      5,435     7,063   19,201    46,018   62,671      62,671     46,985   64,205      64,205   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
Operating expenses:                                                                                                     
 Selling, general and                                                                                                   
  administrative........      3,935     7,341   19,914    39,222   59,652      59,652     42,648   63,174      63,174   
 Depreciation and                                                                                                       
  amortization..........         61       172      301       655    1,882       2,415      1,158    3,208       3,480   
 Stock option based                                                                                                     
  compensation..........        --        --       --        --     1,032       1,032        --       257         257   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
 Total operating                                                                                                        
  expenses..............      3,996     7,513   20,215    39,877   62,566      63,099     43,806   66,639      66,911   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
 Operating income                                                                                                       
  (loss)................      1,439      (450)  (1,014)    6,141      105        (428)     3,179   (2,434)     (2,706)  
 Interest expense.......         88        47      112       121      579      10,178        200    2,135       7,540   
 Extraordinary item,                                                                                                    
  loss on extinguishment                                                                                                
  of debt, net of income                                                                                                
  taxes.................        --        --       --        --       --          --         --     9,971      10,473   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
 Net earnings (loss)....      1,386      (707)    (538)    3,821     (118)     (7,661)     2,050  (12,820)    (17,633)  
                            =======   =======  =======  ======== ========    ========   ======== ========    ========   

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                                                        [Enlarge/Download Table]

                                                                           YEAR                       NINE MONTHS 
                                                                          ENDED      NINE MONTHS         ENDED    
                                                                       DECEMBER 31,     ENDED        SEPTEMBER 30,
                                   YEAR ENDED DECEMBER 31,             AS ADJUSTED  SEPTEMBER 30,     AS ADJUSTED 
                          -------------------------------------------  ------------ ---------------  -------------
                             1992      1993    1994    1995    1996      1996(1)     1996    1997       1997(2)   
                          ----------- ------  ------  ------  -------  ------------ ------  -------  -------------
                          (UNAUDITED)                                                (UNAUDITED)                  
                                        (IN THOUSANDS, EXCEPT RATIOS AND OTHER OPERATING DATA)                    
                                                                                                                  
Per share amounts(8):                                                                                             
 Earnings (loss) before                                                                                           
  extraordinary item....    $  .05      (.02)   (.02)    .13     (.00)      (.23)      .07     (.10)      (.26)   
 Net earnings (loss)....    $  .05      (.02)   (.02)    .13     (.00)      (.23)      .07     (.47)      (.64)   
 Weighted-average                                                                                                 
  shares................    28,785    28,785  28,785  28,785   28,785     33,235    28,785   27,462     27,462    
OTHER FINANCIAL DATA:                                                                                             
EBITDA(3)...............    $1,510    $ (278) $ (577) $6,994  $ 2,990               $4,341  $   602               
Net cash provided by                                                                                              
 (used in) operating                                                                                              
 activities.............       820       924   1,364   5,561    4,904                4,083   (1,002)              
Net cash (used in)                                                                                                
 investing activities...      (667)     (765)   (700) (2,818) (11,262)              (8,261) (13,325)              
Net cash (used in)                                                                                                
 provided by financing                                                                                            
 activities.............        21       (10)    957    (115)  15,924                3,877   58,648               
Ratio of earnings to                                                                                              
 fixed charges(4).......     15.18       --      --    29.76      .84        .26     10.44      --         --     
Capital expenditures....       291       449   1,056   2,652    9,068                6,264   12,463               
Dividends declared per                                                                                            
 common share...........       --        --      --      .02      .02                  .02      --                
OTHER OPERATING DATA (AT                                                                                          
 PERIOD END):                                                                                                     
Retail customers(5):                                                                                              
 Domestic (US)..........     8,261     7,021  16,733  17,464   34,294                        48,785               
 International..........         0     5,301  28,325  56,156  109,922                       167,444               
Wholesale customers(6)..         0         0       0       4       18                            26               
Number of employees.....        54        97     217     296      444                           576               
Number of switches......         0         1       2       3        7                            19               
                                                                [Download Table]

                                                        AS OF SEPTEMBER 30, 1997
                                                        ------------------------
                                                         ACTUAL  AS ADJUSTED (7)
                                                        -------- ---------------
                                                              (UNAUDITED)       
                                                             (IN THOUSANDS)     
                                                                                
BALANCE SHEET DATA:                                                             
Cash and cash equivalents.............................. $ 58,215    $130,025    
Working capital........................................   39,035     110,845    
Property & equipment, net..............................   21,597      21,597    
Total assets...........................................  139,658     214,590    
Long term debt, less current portion...................   25,042      99,975    
Total shareholders' equity.............................   40,922      40,922    

-------                                                                         
(1) Adjusted to give effect to the issuance of the Convertible Notes, the       
offering of Senior Discount Notes and the elimination of interest and   
amortization expense for the Senior Subordinated Notes as if such       
  transactions had occurred on January 1, 1996. As adjusted interest expense
reflects (i) approximately $2.0 million on the Convertible Notes for the
  year ended December 31, 1996, and approximately $7.9 million on the Senior
   Discount Notes for the year ended December 31, 1996 (ii) the elimination of
$0.3 million with respect to the Senior Subordinated Notes, for the year
  ended December 31, 1996 (iii) amortization of fees and costs totaling $0.5
million relating to the Convertible Notes and the offering of Senior    
Discount Notes for the year ended December 31, 1996 using amortization  
  periods equal to the term of the respective issuances (iv) the elimination
 of $0.01 million of amortization of fees and costs relating to the Senior
Subordinated Notes for the year ended December 31, 1996 and (v) the     
 4,450,00 shares issued in connection with the initial public offering and
the underwriters' overallotment option. Interest income has not been    
adjusted to reflect interest earned on additional available cash.       
(2) Adjusted to give effect to the issuance of the Convertible Notes, the       
offering of Senior Discount Notes and the elimination of interest and   
amortization expense for the Senior Subordinated Notes as if such       
  transactions had occurred on January 1, 1997. As adjusted interest expense
reflects (i) approximately $1.5 million on the Convertible Notes for the
   nine-months ended September 30, 1997, and approximately $5.9 million on the
Senior Discount Notes for the nine-months ended September 30, 1997, (ii)
the elimination of $2.0 million with respect to the Senior Subordinated 
  Notes, for the nine-months ended September 30, 1997, (iii) amortization of
fees and                                                                

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costs totaling $0.4 million relating to the Convertible Notes and the   
 offering of Senior Discount Notes for the nine-months ended September 30,
1997 using amortization periods equal to the term of the respective     
  issuances and (iv) the elimination of $0.1 million of amortization of fees
and costs relating to the Senior Subordinated Notes for the nine-months 
  ended September 30, 1997. Interest income has not been adjusted to reflect
interest earned on additional available cash. Adjusted also reflects the
  additional loss of $0.5 million (net of tax) on the extinguishment of debt
as if such transaction had occurred on January 1, 1997.                 
(3) EBITDA represents net earnings (loss) plus net interest expense (income),   
income taxes, depreciation and amortization, non-cash stock option based
compensation and the extraordinary item, loss on extinguishment of debt.
  While EBITDA is not a measurement of financial performance under generally
  accepted accounting principles and should not be construed as a substitute
for net earnings (loss) as a measure of performance, or cash flow as a  
measure of liquidity, it is included herein because it is a measure     
commonly used in the telecommunications industry.                       
(4) The ratio of earnings to fixed charges was computed by dividing earnings    
by fixed charges. For this purpose, earnings consist of income from     
continuing operations, before income taxes and fixed charges of the     
Company and its subsidiaries. Fixed charges consist of the Company's and
its subsidiaries' interest expense and the portion of rent expense      
representative of an interest factor. For the years ended December 31,  
1993, 1994, 1996, 1996 as adjusted, and for the nine months ended       
September 30, 1997, and September 30, 1997 as adjusted, earnings were   
inadequate to cover fixed charges. The dollar amount of the coverage    
deficiency was $436,891, $886,700, $125,770, $10,258,419, $4,214,912 and
$9,892,150, respectively.                                               
(5) Consists of retail customers who received invoices for the last month of    
 the period indicated. Does not include active international customers who
 incurred charges in such month but who had outstanding balances as of the
last day of such month of less than $50, as the Company does not render 
invoices in such instances.                                             
(6) Consists of wholesale customers who received invoices for the last month    
of the period indicated.                                                
(7) Adjusted to give effect to the offering of the Senior Discount Notes as if  
such transaction had occurred on September 30, 1997.                    
(8) Earnings per common and common equivalent share have been computed using    
the weighted-average number of shares of common stock outstanding during
each period as adjusted for the effects of Securities and Exchange      
Commission Staff Accounting Bulletin No. 83. Accordingly, options and   
  warrants to purchase common stock granted within one year of the Company's
initial public offering, which had exercise prices below the initial    
 public offering price per share, have been included in the calculation of
  common equivalent shares, using the treasury stock method, as if they were
outstanding for all periods presented. For the nine-month period ended  
September 30, 1997 and as adjusted, earnings per common share have been 
computed under the provisions of Accounting Principles Board Opinion No.
  15, "Earnings Per Share." Common stock equivalents, which includes options
  and convertible subordinated notes, are not included in the loss per share
calculation as their effect is anti-dilutive.                           

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RISK FACTORS  

In addition to the other information in this Prospectus, including "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition   
and Results of Operations," and the Company's consolidated financial            
statements and notes thereto included elsewhere herein, the following risk      
factors should be considered carefully by prospective investors prior to        
making an investment in the Notes.                                              

SIGNIFICANT LEVERAGE AND DEBT SERVICE                                           

The Company has indebtedness which is substantial in relation to its        
stockholders' equity, as well as interest and debt service requirements which   
are significant compared to its cash flow from operations. As of September 30,  
1997, on a pro forma basis after giving effect to the offering of the Senior    
Discount Notes and the application of the net proceeds therefrom, the Company   
would have had approximately $100.2 million of indebtedness outstanding,        
including the Notes and the Convertible Notes, which would have represented     
71% of total capitalization. See "Capitalization." In addition, the Company     
was permitted to incur up to $15.0 million of indebtedness under the Revolving  
Credit Facility. The Company anticipates entering into the New Credit Facility  
with a bank or other financial institution for available borrowings in an       
amount not expected to exceed $20 million. There can be no assurance that the   
Company will enter into the New Credit Facility.                                

The degree to which the Company is leveraged could have important           
consequences to holders of the Notes, including, but not limited to the         
following: (i) a substantial portion of the Company's cash flow from            
operations must be dedicated to debt service and will not be available for      
operations and other purposes; (ii) the Company's ability to obtain additional  
financing in the future for working capital, capital expenditures,              
acquisitions or general corporate purposes may be impaired; and (iii) certain   
of the Company's borrowings are and will continue to be at variable rates of    
interest, which exposes the Company to the risk of increased interest rates.    

The Company's ability to pay interest on the Notes and to satisfy its other 
obligations will depend upon the Company's future operating performance, which  
will be affected by prevailing economic conditions and financial, business and  
other factors, many of which are beyond the Company's control. Although the     
Company's cash flow from operations has been sufficient to meet its debt        
service obligations in the past, there can be no assurance that the Company's   
operating results will continue to be sufficient for the Company to meet its    
obligations. The Company may be required to refinance the Notes at maturity.    
No assurance can be given that, if required, the Company will be able to        
refinance the Notes on terms acceptable to it, if at all. If the Company is     
unable to service its indebtedness, it will be forced to adopt an alternative   
strategy that may include actions such as reducing or delaying capital          
expenditures or the expansion of the TIGN, selling assets, restructuring or     
refinancing its indebtedness or seeking additional equity capital. There can    
be no assurance that any of these strategies could be effected on terms         
acceptable to the Company, if at all. See "Management's Discussion and          
Analysis of Financial Condition and Results of Operations--Liquidity and        
Capital Resources."                                                             

LIMITATIONS IMPOSED BY CERTAIN INDEBTEDNESS                                     

The Indenture and the indenture governing the Convertible Notes contain     
certain restrictive covenants which affect, and in many respects significantly  
limit or prohibit, among other things, the ability of the Company to incur      
indebtedness, make prepayments of certain indebtedness, make investments,       
engage in transactions with affiliates, create liens, sell assets and engage    
in mergers and consolidations. The collateral securing borrowings under the     
Revolving Credit Facility consisted of substantially all the assets of the      
Company. It is currently anticipated that the New Credit Facility will provide  
for similar collateral arrangements. If the Company were unable to repay        
borrowings under the New Credit Facility, if entered into, the lender           
thereunder could proceed against the collateral securing the New Credit         
Facility. If the indebtedness under the New Credit Facility or, if entered      
into, the New Credit Facility, were to be accelerated, there can be no          
assurance that the assets of the Company would be sufficient to repay such      
indebtedness and the Notes. See "Description of Other Indebtedness--New Credit  
Facility."                                                                      

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OPERATION THROUGH SUBSIDIARIES; STRUCTURAL SUBORDINATION                        

The Company conducts part of its operations through its Subsidiaries. As a  
result, the Company is required to rely, in part, upon payment from its         
Subsidiaries for the funds necessary to meet its obligations, including the     
payment of interest on and principal of the Notes. The ability of the           
Subsidiaries to make such payments will be subject to, among other things,      
applicable state laws. Claims of creditors of the Company's Subsidiaries will   
generally have priority as to the assets of such Subsidiaries over the claims   
of the Company. At September 30, 1997, holders of the Notes would have been     
structurally subordinated to approximately $3.8 million of indebtedness and     
other liabilities (including trade payables) of the Company's Subsidiaries.     

The markets in which the Company's Subsidiaries now conduct business, except
for South Africa, generally do not restrict the removal or conversion of the    
local or foreign currency; however, there can be no assurance that this         
situation will continue. The Company has formed a Subsidiary in South Africa    
which is authorized to handle such repatriation functions on the Company's      
behalf in accordance with applicable laws.                                      

EXPANSION AND OPERATION OF THE TIGN                                             

Historically, a significant portion of the Company's revenue has been       
derived from the provision of traditional call-reorigination services to        
retail customers on a global basis. The Company believes that as deregulation   
occurs and competition increases in various markets around the world, the       
pricing advantage of traditional call-reorigination relative to conventional    
international long distance service will diminish or disappear in those         
markets. The Company believes that, in general, in order to maintain its        
existing customer base and to attract new customers in such markets, it will    
need to be able to offer call-through services at prices at or below the        
current prices charged for traditional call-reorigination. The Company seeks    
to achieve this objective by continuing to expand the TIGN in core and          
selected target markets, thereby enabling it to offer call-through              
international long distance services in deregulated markets. The Company will   
continue to migrate its existing call-reorigination customers and to attract    
new customers in core and selected target markets to the Global Access Direct   
service. There can be no assurance that the Company will be successful in its   
efforts to expand the TIGN or in its efforts to continue to migrate existing    
customers and attract new customers to Global Access Direct service. Failure    
to accomplish this objective could have a material adverse effect on the        
Company's business, financial condition and results of operations.              

The Company has only recently begun operating the TIGN. The long-term       
success of the Company is dependent upon its ability to operate, expand,        
manage and maintain the TIGN, activities in which the Company has limited       
experience. The continued expansion, operation and development of the TIGN      
will depend on, among other factors, the Company's ability to raise additional  
capital through debt and/or equity financing and to accomplish the following:   
(i) acquire switching hardware and peripheral equipment; (ii) program the       
switches with proprietary TIGN software; (iii) transport the hardware and       
peripherals to the switch installation sites; (iv) obtain a switch co-location  
site in each country; (v) obtain access and egress circuit capacity connecting  
the switches to the Public Switched Telephone Network ("PSTN") and/or other     
carriers; (vi) obtain necessary licenses permitting termination and             
origination of traffic; (vii) load switches with customer data; and (viii)      
obtain access to or ownership of transmission facilities linking a switch to    
other TIGN switches. The failure to raise such additional capital or to         
accomplish any of these tasks could cause a significant delay in the            
deployment of the TIGN. Moreover, there can be no assurance that the Company    
has obtained all licenses or approvals necessary to import equipment for use    
in its telecommunications network. Significant delays in the deployment of the  
TIGN could have a material adverse effect on the Company's business, financial  
condition and results of operations.                                            

The successful implementation of the Company's expansion strategy will be   
subject to a variety of risks, including operating and technical problems,      
regulatory uncertainties, possible delays in the full implementation of         
liberalization initiatives, competition and the availability of capital. In     
expanding the TIGN, the Company may encounter technical difficulties because    
of the existence of multiple local technical standards. These difficulties      
could involve a delay in programming new switches with proprietary TIGN         
software or otherwise integrating                                               

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such switches into the TIGN. In addition, in expanding the TIGN, the Company    
may incur substantial capital expenditures and additional fixed operating       
costs. There can be no assurance that the TIGN will grow and develop as         
planned or, if developed, that such growth or development will be completed on  
schedule, at a commercially reasonable cost or within the Company's             
specifications.                                                                 

In deploying the TIGN, the Company must obtain reasonably priced access to  
transmission facilities and interconnection with one or more carriers that      
provide access and egress into and from the PSTN. Although the Company has      
been successful to date in this regard, there can be no assurance that this     
will be the case in the future. See "--Dependence on Telecommunications         
Facilities Providers," "--Intense International and National Competition" and   
"Business--Competition."                                                        

In addition, concurrently with its anticipated expansion, the Company may   
from time to time experience general problems affecting the quality of the      
voice and data transmission of some calls transmitted over the TIGN, which      
could result in poor quality transmission and interruptions in service. To      
provide redundancy in the event of technical difficulties with the TIGN and to  
the extent the Company resells transit and termination capacity from other      
carriers, the Company relies upon other carriers' networks. Whenever the        
Company is required to route traffic over a non-primary choice carrier due to   
technical difficulties or capacity shortages with the TIGN or the primary       
choice carrier, these calls will be more costly to the Company. Any failure by  
the Company to properly operate, expand, manage or maintain the TIGN could      
have a material adverse effect on the Company's business, financial condition   
and results of operations. See "Management's Discussion and Analysis of         
Financial Conditions and Results of Operations" and "Business."                 

NEED FOR ADDITIONAL FINANCING                                                   

The continued development and expansion of the TIGN, the upgrade or         
replacement of the Company's management information systems, the opening of     
new offices, and the introduction of new telecommunications services, as well   
as the funding of anticipated operating losses and net cash outflows, may       
require additional capital. The Company expects that the net proceeds from the  
offering of the Senior Discount Notes will provide the Company with sufficient  
capital to fund planned capital expenditures and anticipated operating losses   
through December 1998. The Company currently anticipates that the net proceeds  
from the offering of the Senior Discount Notes as well as borrowings under the  
New Credit Facility, if entered into, will allow the Company to expand its      
business as planned and to fund anticipated operating losses and net cash       
outflows for the next 18 to 24 months. The amount of the Company's actual       
future capital requirements will depend upon many factors, including the        
performance of the Company's business, the rate and manner in which it expands  
the TIGN, increases staffing levels and customer growth, upgrades or replaces   
management information systems and opens new offices, as well as other 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 change or prove to be inaccurate, the Company does not     
enter into the New Credit Facility, or the net proceeds of the offering of the  
Senior Discount Notes, together with internally generated funds and funds from  
other financings, including the New Credit Facility, if entered into, 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 funds earlier      
than currently anticipated.                                                     

HISTORICAL AND ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY          

For the nine months ended September 30, 1997, the Company had an operating  
loss of $2.4 million and a net loss of $12.8 million, compared to operating     
income and net earnings of $3.2 million and $2.0 million, respectively, for     
the nine months ended September 30, 1996. For the year ended December 31,       
1996, the Company had operating income of $0.1 million and a net loss of $0.1   
million, compared to operating income and net income of $6.1 million and $3.8   
million for the year ended December 31, 1995. The Company expects to incur      
lower gross margins, negative EBITDA and significant operating losses and net   
losses for the near term as it incurs additional costs associated with the      
development and expansion of the TIGN, the expansion of its marketing and       
sales organization, and the introduction of new telecommunications services.    
Furthermore, the                                                                

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Company expects that operations in new target markets will sustain negative     
cash flows until an adequate customer base and related revenue stream have      
been established. There can be no assurance that the Company will achieve or,   
if achieved, will sustain profitability or positive cash flow from operating    
activities in the future. If the Company cannot achieve and sustain             
profitability or positive cash flow, it is likely that it will not be able to   
meet its working capital requirements without additional financing. See "--     
Need for Additional Financing" and "--Potential Fluctuations in Quarterly       
Operating Results."                                                             

In addition, the Company intends to expand its operations in or enter       
markets where it has limited or no operating experience. Furthermore, in many   
of the Company's target markets, the Company intends to offer new services or   
services that have previously been provided only by the local ITOs.             
Accordingly, there can be no assurance that such operations will generate       
operating or net income, and the Company's prospects must therefore be          
considered in light of the risks, expenses, problems and delays inherent in     
establishing a new business in a rapidly changing industry.                     

DEPENDENCE ON EFFECTIVE MANAGEMENT INFORMATION SYSTEMS                          

The Company believes that, based on its current business plan, its          
management information systems will be sufficient for the next 9 to 15 months,  
but will require substantial enhancements, replacements and additional          
investments to continue their effectiveness after such time as the Company      
continues to expand the TIGN and process a higher volume of calls. Contracts    
have been concluded by the Company with both PeopleSoft and Saville Systems     
and for the purchase of key replacement applications. Implementation planning   
for replacement Order Entry, Customer Care, Billing, and Financial systems      
from these two vendors is funded and underway. These activities are being       
pursued by industry-experienced Company staff in cooperation with an approved   
PeopleSoft Implementation Partner (KPMG), and Saville Systems. The failure to   
successfully implement these and other such enhancements, replacements and      
investments in a timely fashion could result in a material adverse effect on    
the Company's business, financial condition and results of operations. Even if  
the Company is successful in implementing these enhancements, replacements and  
investments in a timely fashion there can be no assurance that the Company's    
management information systems will not require further enhancements,           
replacements or investments.                                                    

Historically, the Company has experienced some difficulties in reconciling  
certain carrier accounts or, in some cases, accurately estimating monthly       
carrier costs on a timely basis. These difficulties have affected the           
Company's ability to complete its financial statements on a timely basis. To    
address these issues, the Company has substantially upgraded and continues to   
improve its accounting and billing systems. In addition, the Company has        
developed a call costing and reconciliation system, which was substantially     
implemented in June 1997. While there can be no assurance, the Company          
believes that such improved and newly developed systems will enable the         
Company to prepare its financial statements on a timely basis. Notwithstanding  
such recent developments and upgrades, the Company anticipates that its Small   
Business Technologies ("SBT") accounting, commissions, billing and possibly     
other systems will be required to be further upgraded or replaced in the next   
9 to 15 months. Therefore, the Company has purchased Enterprise Accounting      
Management software from PeopleSoft, and Order Entry, Customer Care, Billing,   
and Accounts Receivable software from Saville Systems. Implementation planning  
for these replacement systems is fully funded and under way. Failure to         
successfully operate existing systems, or successfully replace such SBT         
accounting, commissions, billing and possibly other systems, all in a timely    
fashion, could affect the Company's ability to meet required financial          
reporting deadlines and management's ability to manage the Company efficiently  
and, therefore, could result in a material adverse effect on the Company's      
business, financial condition or results of operations. See "Business--Network  
and Operations."                                                                

RECENT RAPID GROWTH; ABILITY TO MANAGE GROWTH                                   

The Company's ability to continue to grow may be affected by various        
factors, many of which are not within the Company's control, including          
governmental regulation of the telecommunications industry in the United        
States and in other countries, competition, and the transmission capacity.      
Although the Company has                                                        

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experienced significant growth in a relatively short period of time and         
intends to continue to grow rapidly, there can be no assurance that the growth  
experienced by the Company will continue or that the Company will be able to    
achieve the growth contemplated by its business strategy. The Company has       
experienced significant revenue growth and has expanded the number of its       
employees and the geographic scope of its operations. These factors have        
resulted in increased responsibilities for management personnel. The Company's  
ability to continue to manage its growth successfully will require it to        
further expand its network and infrastructure, enhance its management,          
financial and information systems and controls and to effectively expand,       
train and manage its employee base. In addition, as the Company increases its   
service offerings and expands its target markets, there will be additional      
demands on its customer service support and sales, marketing and                
administrative resources. There can be no assurance that the Company will be    
able to successfully manage its expanding operations. If the Company's          
management is unable to manage growth effectively, the Company's business,      
financial condition and results of operations could be materially and           
adversely affected. See "--Dependence on Effective Management Information       
Systems" and "Business."                                                        

SUBSTANTIAL GOVERNMENT REGULATION                                               

General. The global telecommunications industry is subject to international 
treaties and agreements, and to laws and regulations which vary from country    
to country. Enforcement and interpretation of these treaties, agreements, laws  
and regulations can be unpredictable and are often subject to informal views    
of government officials and ministries that regulate telecommunications in      
each country. In certain countries, such government officials and ministries    
are subject to influence by the local ITO.                                      

The Company has pursued and expects to continue to pursue a strategy of     
providing its services to the maximum extent it believes, upon consultation     
with counsel, to be permissible under applicable laws and regulations. To the   
extent that the interpretation or enforcement of applicable laws and            
regulations is uncertain or unclear, the Company's aggressive strategy may      
result in the Company (i) providing services or using transmission methods      
that are found to violate local laws or regulations or (ii) failing to obtain   
approvals or make filings subsequently found to be required under such laws or  
regulations. Where the Company is found to be or otherwise discovers that it    
is in violation of local laws and regulations and believes that it is subject   
to enforcement actions by the FCC or the local authority, it typically seeks    
to modify its operations or discontinue operations so as to comply with such    
laws and regulations. There can be no assurance, however, that the Company      
will not be subject to fines, penalties or other sanctions as a result of       
violations regardless of whether such violations are corrected. If the          
Company's interpretation of applicable laws and regulations proves incorrect,   
it could lose, or be unable to obtain, regulatory approvals necessary to        
provide certain of its services or to use certain of its transmission methods.  
The Company also could have substantial monetary fines and penalties imposed    
against it. Except as set forth in this "Substantial Government Regulation"     
and in "Business--Government Regulation," the Company believes that it is       
currently in compliance with all applicable material domestic and               
international regulatory requirements. To the Company's knowledge, it is not    
currently subject to any material regulatory inquiry or investigation.          

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

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The Company provides a substantial portion of its customers with access to  
its services through the use of call-reorigination. Revenues attributable to    
call-reorigination represented 76.6% of the Company's revenues in fiscal year   
1996 and 75.5% of the Company's revenues for the nine-month period ended        
September 30, 1997, and are expected to continue to represent a significant     
but decreasing portion of the Company's revenues. A substantial number of       
countries have prohibited certain forms of call-reorigination as a mechanism    
to access telecommunications services. This has caused the Company to cease     
providing call-reorigination services to customers in Bermuda, the Bahamas,     
the Philippines, and the Cayman Islands, and may require it to do so with       
respect to customers in other jurisdictions in the future. As of November 20,   
1997, reports had been filed with the ITU and/or the FCC claiming that the      
laws in 79 countries prohibit call-reorigination. While the Company provides    
call-reorigination services in substantially all of these countries, no single  
country within this group accounted for more than 2% of the total revenues of   
the Company for the nine months ended September 30, 1997. There can be no       
assurance that other countries where the Company derives material revenue will  
not prohibit call-reorigination in the future. To the extent that a country     
with an express prohibition against call-reorigination is unable to enforce     
its laws against a provider of such services, it can request that the FCC       
enforce such laws in the United States by, for example, requiring a provider    
of such services to cease providing call-reorigination services to such         
country or, in extreme circumstances, by revoking such provider's FCC           
authorizations. Twenty-nine countries have formally notified the FCC that they  
expressly prohibit call-reorigination. See "--United States--The FCC's          
Policies on Call-reorigination." There can be no assurance that the Company's   
call-reorigination services will not continue to be, or will not become,        
prohibited in certain jurisdictions, including jurisdictions in which the       
Company currently provides call-reorigination services, and, depending on the   
jurisdictions, services and transmission methods affected, there could be a     
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

On February 15, 1997, the United States and more than 60 members of the     
World Trade Organization ("WTO") agreed to open their respective                
telecommunications markets to competition and foreign ownership and to adopt    
regulatory measures to protect market entrants against anticompetitive          
behavior by dominant telephone companies (the "WTO Agreement"). Although the    
Company believes that the WTO Agreement could provide the Company with          
significant opportunities to compete in markets that were not previously        
accessible, reduce its costs and provide more reliable services, it could also  
provide similar opportunities to the Company's competitors. There can be no     
assurance that the pro-competitive effects of the WTO Agreement will not have   
a material adverse effect on the Company's business, financial condition and    
results of operations or that members of the WTO will implement the terms of    
the WTO Agreement.                                                              

United States. In the United States, the provision of the Company's services
is subject to the provisions of the Communications Act of 1934, as amended      
(the "Communications Act"), the 1996 Telecommunications Act (the "1996          
Telecommunications Act") and the FCC regulations thereunder. While the recent   
trend in federal regulation of nondominant telecommunication service            
providers, such as the Company, has been in the direction of reduced            
regulation, this trend has also given AT&T Corp. ("AT&T"), the largest long     
distance carrier in the U.S., increased pricing flexibility that has permitted  
it to compete more effectively with smaller long distance carriers such as      
Telegroup. In addition, the 1996 Telecommunications Act has opened the U.S.     
market to increased competition by allowing the Regional Bell Operating         
Companies ("RBOCs") to provide                                                  
interexchange service for the first time. There can be no assurance that        
future regulatory, judicial and legislative changes will not have a material    
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

U.S. International Long Distance Services. The Company is subject to FCC    
rules requiring authorization from the FCC prior to leasing international       
capacity, acquiring international facilities, and/or purchasing switched        
minutes, and initiating international service between the United States and     
foreign points, as well as to FCC rules which also regulate the manner in       
which the Company's international services may be provided, including the       
circumstances under which the Company may provide international switched        
services by using private lines or route traffic through third countries. FCC   
rules also require prior authorization before transferring control of or        
assigning FCC authorizations, and impose various reporting and filing           
requirements on companies providing                                             

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international services under an FCC authorization. Failure to comply with the   
FCC's rules could result in fines, penalties or forfeiture of the Company's     
FCC authorizations, each of which could have a material adverse effect on the   
Company business, financial condition and results of operations.                

The FCC's Policies on Call-reorigination. The Company offers service by     
means of call-reorigination pursuant to an FCC authorization ("Section 214      
Switched Voice Authorization") under Section 214 of the Communications Act and  
certain relevant FCC decisions. The FCC has determined that call-reorigination  
service using uncompleted call signaling does not violate United States or      
international law, but has held that United States companies providing such     
services must comply with the laws of the countries in which they provide       
service to customers as a condition of such companies' Section 214 Switched     
Voice Authorizations. The FCC reserves the right to condition, modify or, in    
extreme circumstances, revoke any Section 214 Authorizations and impose fines   
for violations of the Communications Act or the FCC's regulations, rules or     
policies promulgated thereunder or for a company's Section 214 Authorization.   
FCC policy provides that foreign governments that satisfy certain conditions    
may request FCC assistance in enforcing their laws against call-reorigination   
providers based in the United States that are violating the laws of these       
jurisdictions. Twenty-nine countries have formally notified the FCC that call-  
reorigination services violate their laws. The Company provides call-           
reorigination in 28 of these countries, which accounted for 7.9% of the         
Company's total revenues for the nine months ended September 30, 1997. Two of   
the 29 countries have requested assistance from the FCC in enforcing their      
prohibitions on call-reorigination within their respective jurisdictions.       
Neither of these two countries accounted for more than 2% of the Company's      
total revenues for the nine months ended September 30, 1997. The FCC has held   
that it would consider enforcement action against companies based in the        
United States engaged in call-reorigination by means of uncompleted call        
signaling in countries where this activity is expressly prohibited. There can   
be no assurance that the FCC will not take action to limit the provision of     
call-reorigination services. Enforcement action could include an order to       
cease providing call-reorigination services in such country, the imposition of  
one or more restrictions on the Company, monetary fines or, in extreme          
circumstances the revocation of the Company's Section 214 Switched Voice        
Authorization, and could have a material adverse effect on the Company's        
business, financial condition and results of operations.                        

The FCC's Private Line Resale Policy. The FCC's private line resale policy  
currently prohibits a carrier from reselling international private leased       
circuits to provide switched services (known as "ISR") to or from a country     
unless the FCC has found that the country affords U.S. carriers equivalent      
opportunities to engage in similar activities in that country. Thus far, the    
FCC has found that Canada, the United Kingdom, Sweden, New Zealand and          
Australia afford such opportunities to U.S. carriers. In separate proceedings,  
the FCC is considering equivalency determinations for the Netherlands, Chile,   
Denmark, Finland and Mexico. The FCC has decided to modify its policy on        
private line resale to allow such resale to countries that are members of the   
WTO and where the local ITO generally charges U.S. carriers at or below an FCC  
determined rate for terminating the U.S. carriers' traffic. As a result, the    
Company may be allowed to engage in private line resale to a larger number      
countries. The Company has entered into an arrangement with a wholly owned      
Subsidiary in Australia that involves the transmission over private lines of    
switched services to or from Australia. Although the FCC has made a             
determination that resale opportunities in Australia are deemed equivalent      
pursuant to the FCC's rules and policies, the Company cannot take advantage of  
this finding because the local ITO does not charge U.S. carriers at or below    
an FCC determined rate for terminating the U.S. carriers' traffic. The Company  
anticipates                                                                     
being able to take advantage of Australia's "equivalency" designation around    
February 1998, when new FCC rules permit carriers to engage in ISR if they      
meet either the FCC's "equivalency" rules or its new rules. The FCC has         
granted the Company's request for a waiver allowing the Company to deviate      
from the existing FCC approved $0.22 per minute settlement rate and to          
contract at $0.05 per minute, pursuant to an agreement with its Subsidiary in   
Australia. The Company has recently initiated service pursuant to this          
agreement. There can be no assurance, however, that the FCC or any other        
country's regulatory authority will change their policies in a way that would   
have a beneficial impact on the Company or that would not have a material       
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

The FCC's Policies on Transit and Refile. The FCC is currently considering a
1995 request (the "1995 Request") to limit or prohibit the practice whereby a   
carrier routes, through its facilities in a third country, traffic              

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originating from one country and destined for another country. The FCC has      
permitted third country calling where all countries involved consent to the     
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. While the Company's revenues attributable to refiling        
arrangements are minimal, refiling may constitute a larger portion of the       
Company's operations in the future. The FCC to date has made no pronouncement   
as to whether refiling arrangements are inconsistent with U.S. or ITU           
regulations, although it is considering these issues in connection with the     
1995 Request. It is possible that the FCC will determine that refiling          
violates U.S. and/or international law, which could have a material adverse     
effect on the Company's business, financial condition and results of            
operations.                                                                     

The FCC's International Settlements Policy. The Company is also required to 
conduct its facilities-based international business in compliance with the      
FCC's international settlements policy (the "ISP"). The ISP establishes the     
permissible arrangements for U.S. based facilities-based carriers and their     
foreign counterparts to settle the cost of terminating each other's traffic     
over their respective networks. One of the Company's arrangements with foreign  
carriers is subject to the ISP and it is possible that the FCC could take the   
view that this arrangement does not comply with the existing ISP rules. See     
"The Global Telecommunications Industry--International Switched Long Distance   
Services--Operating Agreements." If the FCC, on its own motion or in response   
to a challenge filed by a third party, determines that the Company's foreign    
carrier arrangements do not comply with FCC rules, among other measures, it     
may issue a cease and desist order, impose fines on the Company or, in extreme  
circumstances, revoke or suspend its FCC authorizations. See "--Recent and      
Potential FCC Actions." Such action could have a material adverse effect on     
the Company's business, financial condition and results of operations.          

The FCC's Tariff Requirements for International Long Distance Services. The 
Company is also required to file and has filed with the FCC a tariff            
containing the rates, terms and conditions applicable to its international      
telecommunications services. The Company is also required to file with the FCC  
any agreements with customers containing rates, terms, and conditions for       
international telecommunications services, if those rates, terms, or            
conditions are different than those contained in the Company's tariff.          
Notwithstanding the foregoing requirements, to date, the Company has not filed  
with the FCC certain commercially sensitive carrier-to-carrier customer         
contracts. If the Company charges rates other than those set forth in, or       
otherwise violates, its tariff or a customer agreement filed with the FCC, or   
fails to file with the FCC carrier-to-carrier agreements, the FCC or a third    
party could bring an action against the Company, which could result in a fine,  
a judgment or other penalties against the Company. Such action could have a     
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

Recent and Potential FCC Actions. Regulatory action that has been and may be
taken in the future by the FCC may enhance the intense competition faced by     
the Company. The FCC recently enacted certain changes in its rules designed to  
permit alternative arrangements outside of its ISP as a means of encouraging    
competition and achieving lower, cost-based accounting and collection rates as  
more facilities-based competition is permitted in foreign markets.              
Specifically, the FCC has decided to allow U.S. carriers, subject to certain    
competitive safeguards, to propose methods to pay for international call        
termination that deviate from traditional bilateral                             
accounting rates and the ISP. The FCC has also established lower ceilings       
("benchmarks") for the rates that U.S. carriers will pay foreign carriers for   
the termination of international services. Moreover, the FCC recently changed   
its rules to implement the WTO Agreement, in part by allowing U.S. carriers to  
accept certain exclusive arrangements with certain foreign carriers. While      
these rule changes may provide the Company with more flexibility to respond     
more rapidly to changes in the global telecommunications market, it will also   
provide similar flexibility to the Company's competitors. The implementation    
of these changes could have a material adverse effect on the Company's          
business, financial condition and results of operations.                        

U.S. Domestic Long Distance Services. The Company's ability to provide      
domestic long distance service in the United States is subject to regulation    
by the FCC and relevant state Public Service Commissions ("PSCs")               

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which regulate interstate and intrastate rates, respectively, ownership of      
transmission facilities, and the terms and conditions under which the           
Company's domestic U.S. services are provided. In general, neither the FCC nor  
the relevant state PSCs exercise direct oversight over prices charged for the   
Company's services or the Company's profit levels, but either or both may do    
so in the future. The Company, however, is required by federal and state law    
and regulations to file tariffs listing the rates, terms and conditions of      
services provided. The Company has filed domestic long distance tariffs with    
the FCC. The FCC adopted an order on October 29, 1996 (the "October 29, 1996    
Order") eliminating the requirement that non-dominant interstate carriers,      
such as the Company, maintain FCC tariffs. However, on February 13, 1997, the   
United States Court of Appeals for the DC Circuit stayed the October 29, 1996   
Order, pending judicial review of the Order. Elimination of tariffs will        
require that the Company secure contractual agreements with its customers       
regarding many of the terms of its existing tariffs or face possible claims     
over the respective rights of the parties once these rights are no longer       
clearly defined in tariffs. The Company generally is also required to obtain    
certification from the relevant state PSC prior to the initiation of            
intrastate service. Telegroup has the authorizations required or is not         
required to obtain authorization to provide service in 47 states, and has       
filed or is in the process of filing required tariffs in each state that        
requires such tariffs to be filed. The Company has complied, or is in the       
process of complying, with reporting requirements imposed by state PSCs in      
each state in which it conducts business. Any failure to maintain proper        
federal and state tariffing or certification or file required reports, or any   
difficulties or delays in obtaining required authorizations, could have a       
material adverse effect on the Company's business, financial condition and      
results of operations. The FCC also imposes some requirements for marketing of  
telephone services and for obtaining customer authorization for changes in the  
customer's primary long distance carrier. If these requirements are not met,    
the Company may be subject to fines and penalties.                              

To originate and terminate calls in connection with providing their         
services, long distance carriers such as the Company must purchase "access      
services" from local exchange carriers ("LECs") or competitive local exchange   
carriers ("CLECs"). Access charges represent a significant portion of the       
Company's cost of U.S. domestic long distance services and, generally, such     
access charges are regulated by the FCC for interstate services and by PSCs     
for intrastate services. The FCC has undertaken a comprehensive review of its   
regulation of LEC access charges to better account for increasing levels of     
local competition. On May 16, 1997, the FCC released an order making            
significant changes in the access service rate structure. Some of the changes   
may result in increased costs to the Company for the "transport" component of   
access services, although other revisions of the order likely will reduce       
other access costs. Some issues in the FCC proceeding have not yet been         
resolved, including a proposal under which LECs would be permitted to allow     
volume discounts in the pricing of access charges. While the resolution of      
these issues is uncertain, if these rate structures are adopted, many long      
distance carriers, including the Company, could be placed at a significant      
cost disadvantage to larger competitors. In addition, the FCC has adopted       
certain measures to implement the 1996 Telecommunications Act that will impose  
new regulatory requirements, including the requirement that the Company         
contribute some portion of its telecommunications revenues to a "universal      
service fund" designated to fund affordable telephone service for consumers,    
schools, libraries and rural healthcare providers. These contributions will     
become payable beginning in 1998 for all interexchange carriers. Although the   
FCC has not determined the precise amount of the contribution, the Company      
estimates at this time that it will constitute approximately 4% of its gross    
revenues from domestic end-user customers.                                      

In some instances, the Company may be responsible for city sales taxes on   
calls made within the jurisdiction of certain U.S. cities. The Company is       
implementing software to track and bill for this tax liability. However, the    
Company may be subject to sales tax liability for calls transmitted prior to    
the implementation of such tax software and against which it has no             
corresponding customer compensation. While the Company believes that any such   
liability will not be significant, there can be no assurance that such tax      
liability, if any, will not have a material adverse effect on the Company's     
business, financial condition and results of operations.                        

In November 1996, the FCC adopted rules that would require that             
interexchange companies offering toll-free access through payphones compensate  
certain payphone operators for customers' use of the payphone. On July 1,       
1997, the United States Court of Appeals for the District of Columbia Circuit   
issued an opinion reversing                                                     

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in part the FCC's payphone orders. The Court of Appeals ruled that the rate of  
$.35 per call was arbitrary and capricious and remanded the case to the FCC     
for further proceedings. The FCC issued a Second Report and Order on October    
9, 1997, including that interexchange carriers must compensate payphone owners  
at a rate of $.284 per call for all calls using their payphones. This           
compensation method will be effective from October 7, 1997 through October 7,   
1999. After this time period, interexchange carriers will be required to        
compensate payphone owners at a market-based rate minus $0.066 per call. A      
number of carriers have appealed the Second Report and Order to the U.S. Court  
of Appeals for the D.C. Circuit or have sought FCC reconsideration of this      
order. Although the Company cannot predict the outcome of the FCC's             
proceedings on the Company's business, it is possible that such proceedings     
could have a material adverse effect on the Company's business, financial       
condition and results of operations.                                            

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

European Union. Historically, European countries have prohibited the direct 
transport and switching of speech in real-time between switched network         
termination points ("Voice Telephony") except by the ITO. Although the          
regulation of the telecommunications industry is governed at a supra-national   
level by the European Union ("EU"), the Company's provision of services in the  
EU is subject to the laws and regulations of each EU member state in which it   
provides services. The Full Competition Directive 96/19 (which together with    
its subsidiary directives is hereinafter called the "Full Competition           
Directive") was adopted on March 13, 1996 and requires the liberalization of    
Voice Telephony and the freedom to create alternative telecommunications        
infrastructures within EU member states (Austria, Belgium, Denmark, Finland,    
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,           
Portugal, Spain, Sweden, and the United Kingdom). While the Full Competition    
Directive sets January 1, 1998 as the deadline for each EU member state to      
enact its own laws to implement such directive, subject to extensions granted   
to Spain (December 1998), Ireland (January 1, 2000), Greece (2000), Luxembourg  
(July 1, 1998) and Portugal (2000), there can be no assurance that each EU      
member state will enact laws that implement the Full Competition Directive      
within the allotted time frame or at all. The European Commission has           
announced plans to initiate legal action against Belgium, Denmark, Germany,     
Greece, Italy, Luxembourg and Portugal for not implementing this legislation    
adequately. If the Commission is not satisfied with the explanations given by   
these countries for their delay, the Commission may take action that            
ultimately could result in a decision by the European Court of Justice          
concerning whether these countries have violated the Full Competition           
Directive. To the extent the Full Competition Directive is not implemented, or  
not properly or fully implemented, in a particular member state, the Company    
will not be able to offer its full range of services or utilize certain         
transmission or access methods in that country.                                 

Each EU member state in which the Company currently conducts business has a 
different national regulatory scheme and regulatory variations among the        
member states are expected to continue for the foreseeable future. In the EU,   
the Company currently owns and operates switching facilities in the United      
Kingdom, the Netherlands and France and provides other telecommunications       
services in certain other member countries. The requirements for the Company    
to obtain necessary approvals to offer the full range of telecommunications     
services, including Voice Telephony, vary considerably from country to          
country. In the U.K., the Company provides Voice Telephony pursuant to a class  
license and holds a license under Section 7 of                                  
the Telecommunications Act of 1984 to engage in ISR. The U.K. government is     
considering replacing the ISR license with a new license applicable to a        
narrower scope of activities. The Company may have to apply for a new license   
if the U.K. government replaces the ISR license and if the Company's            
activities fall within the scope of activities covered by the new license.      
Other than in the U.K., the Company has not obtained approvals necessary to     
provide Voice Telephony in any EU member country. There can be no assurance     
that the Company has received all necessary approvals, filed applications for   
such approvals, received comfort letters or obtained all necessary licenses     
from the applicable regulatory authorities to offer telecommunications          
services in the EU, or that it will do so in the future. The Company's failure  
to obtain, or retain necessary approvals could have a material adverse effect   
on the Company's business, financial condition and results of operations.       

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Liberalization in EU member states and Switzerland is proceeding rapidly and
the Company is seeking to keep pace with competition even where ITOs retain a   
legally mandated monopoly on Voice Telephony. In France, Germany and            
Switzerland, the Company is currently providing traditional or transparent      
call-reorigination services, but anticipates that it will migrate CUGs and      
other customers to forms of call-through other than transparent call-           
reorigination prior to January 1, 1998, the date on which full competition      
with the ITOs will be permitted. The Company anticipates providing a range of   
enhanced telecommunications services and switched voice services in France,     
Germany and Switzerland to business users, including to CUGs, prior to January  
1, 1998, by routing traffic via the international switched networks of          
competitors to the French, German or Swiss ITOs, respectively. While the        
Company believes that it will not be found to be offering Voice Telephony in    
these countries prior to the expiration of the ITO's monopoly on such           
services, the Company has received no assurance from the respective ITOs or     
from the respective regulating authorities that this will be the case. It is    
possible that the Company could be fined, or that the Company would not be      
allowed to provide specific services in these countries, if the Company were    
found to be providing Voice Telephony before January 1, 1998, or after that     
date without obtaining a proper license. Such actions could have a material     
adverse impact on the Company's business, financial condition and results of    
operations.                                                                     

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

The Pacific Rim. Regulation of the Company's activities varies in the       
Pacific Rim depending upon the particular country involved. The Company's       
ability to provide voice telephony services is restricted in all countries      
where the Company provides services except Australia and New Zealand, although  
service between Australia or New Zealand and other countries may be             
constrained by restrictions in the other countries. In Australia and New        
Zealand, regulation of the Company's provision of telecommunications services   
is relatively permissive, although registration in New Zealand with the         
regulator is required for ISR. The Company's Australian Subsidiary was          
enrolled in Australia as a "Supplier of Eligible International Services" under  
the Telecommunications Act 1991, and now has the right to supply equivalent     
services under the Telecommunications Act 1997. Additionally, in Japan, the     
Company provides call-reorigination services but may not provide basic          
switched voice services to the public. The Company may, with a license,         
provide a broad array of value-added services, as well as limited switched      
voice services to CUGs. The Japanese government has indicated that it will      
permit carriers such as the Company to apply for ISR authority some time in     
1997. There can be no assurance that the Company will be permitted to apply     
for ISR authority, or (if it is permitted to apply) that ISR authority will be  
granted, and the failure to obtain such authority could have an adverse effect  
on the Company's plans to expand its services in Japan.                         

Call-reorigination services have been expressly permitted by the regulator  
in Hong Kong. In Hong Kong, the Company has been issued a Public Non-Exclusive  
Telecommunications Services ("PNETS") license which permits the provision of    
personal identification number validation and call routing service and          
facsimile communication service, and which, in general, has been interpreted    
to permit the provision of call-reorigination services. A range of              
international telephone services, including the operation of an international   
gateway for all incoming and outgoing international calls, is provided in Hong  
Kong solely by Hong Kong Telecommunications                                     

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International Limited ("HKTI"), the Hong Kong ITO, pursuant to an exclusive     
license which will expire on October 1, 2006. The regulator in Hong Kong has    
sought to encourage competition in international services consistent with       
HKTI's exclusivities. For example, the Company may, with a license, provide a   
broad array of value-added services, as well as limited basic switched voice    
services to CUGs. In addition, the Hong Kong government has entered into        
discussions with HKTI concerning a possible early termination of its exclusive  
license and it has been reported that HKTI's exclusive license may be           
terminated as early as 1999. In developing a competitive position in Hong       
Kong, the Company has sought to provide international services to and from      
Hong Kong to the maximum extent permitted under the current Hong Kong           
regulatory regime, through, for example, agreements with providers within Hong  
Kong. There can be no guarantee that the Hong Kong regulator will not change    
its regulations or policy or, where the Company has interpreted laws and/or     
regulations that are unclear, not find that the Company is in violation of      
existing laws or that such change or finding will not require the Company to    
cease providing certain services to and from Hong Kong.                         

There can be no assurance that the People's Republic of China ("China") will
continue the existing licensing regime with respect to the Hong Kong            
telecommunications industry. There is also no assurance that China will         
continue to implement the existing policies of the Hong Kong government with    
respect to promoting the liberalization of the Hong Kong telecommunications     
industry in general, including the policy allowing call-reorigination, which    
is currently prohibited in China. For the nine months ended September 30,       
1997, one wholesale customer in Hong Kong, New T&T Hong Kong Limited (the       
"Hong Kong Customer"), accounted for approximately 12% of the Company's total   
revenues. Substantially all of the services provided by the Company to this     
customer consists of call-reorigination services. The initial term of the       
Company's agreement with the Hong Kong Customer expires in October 1998,        
automatically renews for one-year periods, and may be terminated by the Hong    
Kong Customer if it determines in good faith that the services provided         
pursuant to the agreement are no longer commercially viable in Hong Kong. If    
the Company loses its rights under its PNETS license and/or if it is unable to  
provide call-reorigination services in Hong Kong on either a retail or          
wholesale basis, such action could have a material adverse effect on the        
Company's business, financial condition and results of operations. In           
addition, a material reduction in the level of services provided by the         
Company to the Hong Kong Customer or a termination of the Company's agreement   
with the Hong Kong Customer could have a material adverse effect on the         
Company's business, financial condition and results of operations.              

In all other Pacific Rim countries, the Company is strictly limited in its  
provision of public voice and value added services. While some countries in     
the Pacific Rim oppose call-reorigination, the Company generally has not faced  
significant regulatory impediments. China has specifically informed the FCC     
that call-reorigination is illegal in that country. Australia, New Zealand,     
Japan and Hong Kong do not prohibit call-reorigination. If the Company is       
unable to provide the services it is presently providing or intends to provide  
or to use its existing or contemplated transmission methods due to its          
inability to receive or retain formal or informal approvals for such services   
or transmission methods, or for any other reason related to regulatory          
compliance or the lack thereof, such events could have a material adverse       
effect on the Company's business, financial condition and results of            
operations. See "Business--Government Regulation."                              

Other Non-U.S. Markets. To the extent that it seeks to provide              
telecommunications services in other non-U.S. markets, the Company will be      
subject to the developing laws and regulations governing the competitive        
provision of telecommunications services in those markets. The Company          
currently plans to provide a limited range of services in South Africa and      
certain Latin American countries, as permitted by regulatory conditions in      
those markets, and to expand its operations as these markets implement          
liberalization to permit competition in the full range of telecommunications    
services. The nature, extent and timing of the opportunity for the Company to   
compete in these markets will be determined, in part, by the actions taken by   
the governments in these countries to implement competition and the response    
of incumbent carriers to these efforts. There can be no                         
assurance that any of these countries will implement competition in the near    
future or at all, that the Company will be able to take advantage of any such   
liberalization in a timely manner, or that the Company's operations in any      
such country will be successful. See "Business--Government Regulation."         

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DEPENDENCE ON INDEPENDENT AGENTS; CONCENTRATION OF MARKETING RESOURCES          

The Company's success depends in significant part on its ability to recruit,
maintain and motivate a network of independent agents, including its Country    
Coordinators. Telegroup's international market penetration has resulted         
primarily from the sales activities of independent agents compensated on a      
commission basis. As of November 30, 1997, Telegroup had approximately 1,375    
independent agents worldwide. The Company is subject to competition in the      
recruitment of independent agents from other organizations that use             
independent agents to market their products and services, including those that  
market telecommunications services. The motivation of the independent agents,   
which can be affected by general economic conditions and a number of            
intangible factors, may impact the effectiveness of the independent agents'     
ability to recruit customers for the Company's services. Because of the number  
of factors that affect the recruiting of independent agents, the Company        
cannot predict when or to what extent such increases or decreases in the level  
of independent agent activity will occur. There can be no assurance that the    
Company will be able to continue to effectively recruit, maintain and motivate  
independent agents and, to the extent the Company is not able to do so, the     
Company's business, results of operations and financial condition could be      
materially and adversely affected.                                              

As of September 30, 1997, approximately one-third of the Company's retail   
revenues were derived from customers enrolled by agents who are contractually   
prohibited from offering telecommunications services of the Company's           
competitors to their customers during the term of their contract and typically  
for a period of two years thereafter. Contracts with independent agents         
entered into by the Company after July 1996 typically provide for such          
exclusivity. As earlier agreements expire, the Company has generally required   
its independent agents to enter into such new agreements. In the past, certain  
independent agents have elected to terminate their relationship with the        
Company in lieu of entering into new independent agent agreements. In the       
event that independent agents transfer a significant number of customers to     
other service providers or that a significant number of agents decline to       
renew their contracts under the new terms and move their customers to another   
carrier, this would have a material adverse effect on the Company's business,   
financial condition and results of operations. See "Business--Business          
Strategy" and "Business--Sales, Marketing and Customer Service."                

While the Company has an extensive marketing and sales organization         
consisting of a worldwide network of independent agents and an internal sales   
force, a significant portion of the Company's revenues are generated from a     
limited number of these individuals. For the nine months ended September 30,    
1997, the Company's internal sales force was responsible for approximately      
41.3% of the Company's U.S. domestic long distance retail service revenues,     
and approximately 7.7% of the Company's total revenues. For the nine months     
ended September 30, 1997, 10 independent agents and/or Country Coordinators     
were responsible for generating 33.6% of the Company's international long       
distance service billings and 50 independent agents and/or Country              
Coordinators were responsible for generating 58.9% of the Company's             
international long distance service billings. Any loss of the Company's         
internal sales force or certain of the Company's more productive independent    
agents or Country Coordinators could have a material adverse effect on the      
Company's business, financial condition and results of operations.              

In connection with the Company's efforts to market its Global Access Direct 
service, the Company anticipates that commission rates paid to its independent  
agents for customer usage of Global Access Direct service may in some cases be  
lower than those paid for marketing call-reorigination services. While the      
Company does not believe that a lower commission rate will have a material      
adverse effect on the Company's ability to market its Global Access Direct      
service or to retain its independent agents, there can be no assurance that     
this will be the case. In the event that the Company is unable to effectively   
market its Global Access Direct service or retain its independent agents, such  
events would have a material adverse effect on the Company's business,          
financial condition and results of operations.                                  

INTENSE INTERNATIONAL AND NATIONAL COMPETITION                                  

The international and national telecommunications industry is highly        
competitive. The Company's success depends upon its ability to compete with a   
variety of other telecommunications providers in each of its markets,           

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including the respective ITO in each country in which the Company operates and  
global alliances among some of the world's largest telecommunications           
carriers. Other potential competitors include cable television companies,       
wireless telephone companies, Internet access providers, electric and other     
utilities with rights of way, railways, microwave carriers and large end users  
which have private networks. The intensity of such competition has recently     
increased and the Company believes that such competition will continue to       
intensify as the number of new entrants increases. If the Company's             
competitors devote significant additional resources to the provision of         
international or national long distance telecommunications services to the      
Company's target customer base of high-volume residential consumers and small   
and medium-sized businesses, such action could have a material adverse effect   
on the Company's business, financial condition and results of operations, and   
there can be no assurance that the Company will be able to compete              
successfully against such new or existing competitors.                          

Many of the Company's competitors are significantly larger, have            
substantially greater financial, technical and marketing resources, larger      
networks and a broader portfolio of services than the Company. Additionally,    
many competitors have strong name recognition and "brand" loyalty, long-        
standing relationships with the Company's target customers, and economies of    
scale which can result in a lower relative cost structure for transmission and  
related costs. These competitors include, among others, AT&T, MCI               
Telecommunications Corporation ("MCI"), Sprint Communications, Inc.             
("Sprint"), WorldCom, Inc. ("WorldCom"), Cable & Wireless, Inc., Frontier       
Corp. ("Frontier") and LCI International, Inc. ("LCI") and RBOCs outside their  
exchange territories providing long distance services in the United States;     
France Telecom in France, PTT Telecom B.V. in the Netherlands, Cable &          
Wireless plc, British Telecommunications plc ("BT"), Mercury Communications     
Ltd. ("Mercury"), AT&T, WorldCom, Sprint and ACC Corp. in the United Kingdom;   
Deutsche Telecom AG ("Deutsche Telecom") in Germany; Swisscom in Switzerland;   
Telia AB and Tele-2 in Sweden; HKTI in Hong Kong, Telstra and Optus in          
Australia; and Kokusan Denshin, Denwa ("KDD"), NTT Worldwide                    
Telecommunications, International Telecom Japan ("ITJ") and International       
Digital Communications ("IDC") in Japan. The Company competes with numerous     
other long distance providers, some of which focus their efforts on the same    
customers targeted by the Company. In addition to these competitors, recent     
and pending deregulation in various countries may encourage new entrants. For   
example, as a result of the recently enacted 1996 Telecommunication Act in the  
United States, once certain conditions are met, RBOCs will be allowed to enter  
the domestic long distance market, AT&T, MCI and other long distance carriers   
will be allowed to enter the local telephone services market, and any entity    
(including cable television companies and utilities) will be allowed to enter   
both the local service and long distance telecommunications markets. Moreover,  
while the recently completed WTO Agreement could create opportunities for the   
Company to enter new foreign markets, implementation of the accord by the       
United States and other countries could result in new competition from ITOs     
previously banned or limited from providing services in the United States.      
Increased competition in such countries as a result of the foregoing, and       
other competitive developments, including entry by Internet service providers   
into the long-distance market, could have an adverse effect on the Company's    
business, financial condition and results of operations. In addition, many      
smaller carriers have emerged, most of which specialize in offering             
international telephone services utilizing dial-up access methods, some of      
which have begun to build networks similar to the TIGN. See "The Global         
Telecommunications Industry."                                                   

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

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The long distance telecommunications industry is intensely competitive and  
is significantly influenced by the pricing and marketing decisions of the       
larger industry participants. In the United States, the industry has            
relatively limited barriers to entry with numerous entities competing for the   
same customers. Customers frequently change long distance providers in          
response to the offering of lower rates or promotional incentives by            
competitors. Generally, the Company's domestic customers can switch carriers    
at any time. The Company believes that competition in all of its markets is     
likely to increase and that competition in non-United States markets is likely  
to become more similar to competition in the United States market over time as  
such non-United States markets continue to experience deregulatory influences.  
In each of the countries where the Company markets its services, the Company    
competes primarily on the basis of price (particularly with respect to its      
sales to other carriers), and also on the basis of customer service and its     
ability to provide a variety of telecommunications products and services.       
There can be no assurance that the Company will be able to compete              
successfully in the future. The Company anticipates that deregulation and       
increased competition will result in decreasing customer prices for             
telecommunications services. The Company believes that the effects of such      
decreases will be at least partially offset by increased telecommunications     
usage and decreased costs as the percentage of its traffic transmitted over     
the TIGN increases. There can be no assurance that this will be the case. To    
the extent this is not the case, there could be an adverse effect on the        
Company's margins and financial profits, and the Company's business, financial  
condition and results of operations could be materially and adversely           
effected.                                                                       

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

RISK OF NETWORK FAILURE                                                         

The success of the Company is largely dependent upon its ability to deliver 
high quality, uninterrupted telecommunication services and on its ability to    
protect its software and hardware against damage from fire, earthquake, power   
loss, telecommunications failure, natural disaster and similar events. Any      
failure of the TIGN or other systems or hardware that causes interruptions in   
the Company's operations could have a material adverse effect on the Company.   
As the Company expands the TIGN and call traffic grows, there will be           
increased stress on hardware, circuit capacity and traffic management systems.  
There can be no assurance that the Company will not experience system           
failures. The Company's operations are also dependent on its ability to         
successfully expand the TIGN and integrate new and emerging technologies and    
equipment into the TIGN, which could increase the risk of system failure and    
result in further strains upon the TIGN. The Company attempts to minimize       
customer inconvenience in the event of a system disruption by routing traffic   
to other circuits and switches which may be owned by other carriers. However,   
significant or prolonged system failures, or difficulties for customers in      
accessing, and maintaining connection with, the TIGN could damage the           
reputation of the Company and result in customer attrition and financial        
losses. Additionally, any damage to the Company's Network Operations Center     
could have a negative impact on the Company's ability to monitor the            
operations of the TIGN and generate accurate call detail reports.               

DEPENDENCE ON TELECOMMUNICATIONS FACILITIES PROVIDERS                           

The Company's success will continue to depend, in part, on its ability to   
obtain and utilize transmission capacity on a cost-effective basis. The         
Company currently owns only a limited amount of telecommunications              
transmission infrastructure. Telephone calls made by the Company's customers    
may be transmitted via one or                                                   

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more of the following types of circuit capacity: (i) capacity purchased from    
another carrier on a per minute basis under a simple resale agreement; (ii)     
capacity leased from another carrier; or (iii) capacity owned by Telegroup on   
an IRU basis. In addition, the Company requires leased circuit capacity to      
provide access and egress between its switches and the local PSTN in each       
country.                                                                        

The Company obtains most of its transmission capacity under a variety of    
volume-based resale arrangements with facilities-based and other carriers       
including ITOs. The Company has entered into resale agreements with more than   
20 carriers in the U.S., U.K., Canada, the Netherlands, Denmark, Australia,     
Hong Kong and Switzerland. Under these arrangements, the Company is subject to  
the risk of unanticipated price fluctuations and service restrictions or        
cancellations. The Company generally has not experienced sudden or              
unanticipated price fluctuations, service restrictions or cancellations         
imposed by such facilities-based carriers but there can be no assurance that    
this will be the case in the future. The Company has entered into a resale      
agreement with Sprint which contains a net monthly usage commitment of          
$1,500,000, with the Company liable for 25% of any shortfall below such         
commitment level. The Sprint agreement terminates in December 1997 and is       
cancelable by the Company or Sprint on 90 days' notice, subject to the payment  
of an early termination fee. The failure of the Company to meet the net         
monthly usage commitments contained in this agreement could have a material     
adverse effect on the Company's business, financial condition and results of    
operations. Although the Company believes that its arrangements and             
relationships with such carriers generally are satisfactory, the deterioration  
or termination of the Company's arrangements and relationships, or the          
Company's inability to enter into new arrangements and relationships with one   
or more of such carriers could have a material adverse effect upon the          
Company's cost structure, service quality, network coverage, results of         
operations and financial condition.                                             

In addition, the Company leases circuit capacity at fixed terms ranging up  
to 12 months under arrangements with facilities-based long distance carriers.   
As a result, the Company depends upon facilities-based carriers such as the     
ITOs in each of the countries in which the Company operates to supply the       
Company with high capacity transmission links. Some of these carriers are or    
may become competitors of the Company. The Company has periodically             
experienced difficulties with the quality of the services provided by such      
carriers. In addition, the Company has experienced delays in obtaining access   
and egress transmission lines supplied by ITOs and other facilities-based       
carriers. While the Company seeks to minimize the impact of such difficulties,  
there can be no assurance that difficulties with circuit access and quality of  
service will not arise in the future and constitute a material adverse effect.  
See "--Intense International and National Competition," "Business Competition"  
and "Business--Regulation." Moreover, minimum volume contracts may result in    
relatively high fixed costs to the extent that the Company does not generate    
the requisite traffic volume over the particular route. See "Business--Network  
and Operations."                                                                

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS                                  

A key component of the Company's strategy is its expansion in international 
markets. In many international markets, the ITO controls access to the local    
networks, enjoys better brand recognition and brand and customer loyalty, and   
possesses significant operational economies, including a larger backbone        
network and operating agreements with other ITOs. Moreover, an ITO may take     
many months before allowing competitors, including the Company, to              
interconnect to its switches within the target market. Pursuit of               
international growth opportunities may require significant investments for      
extended periods of time before returns, if any, on such investments are        
realized. In addition, there can be no assurance that the Company will be able  
to obtain the permits and operating licenses required for it to operate,        
obtain access to local transmission facilities or market, sell and deliver      
competitive services in these markets.                                          

In addition to the uncertainty as to the Company's ability to expand its    
international presence, there are certain risks in conducting business          
internationally, which could have a material adverse effect on the Company's    
international operations, including its strategy to open additional offices in  
foreign countries and its ability to repatriate net income from foreign         
markets. Such risks may include unexpected changes in regulatory                

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requirements, VAT, tariffs, customs, duties and other trade barriers,           
difficulties in staffing and managing foreign operations, problems in           
collecting accounts receivable, political risks, fluctuations in currency       
exchange rates, foreign exchange controls which restrict or prohibit            
repatriation of funds, technology export and import restrictions or             
prohibitions, delays from customs brokers or government agencies, seasonal      
reductions in business activity during the summer months in Europe and certain  
other parts of the world, and potentially adverse tax consequences resulting    
from operating in multiple jurisdictions with different tax laws. In addition,  
the Company's business could be adversely affected by a reversal in the         
current trend toward deregulation of telecommunications carriers. In certain    
countries into which the Company may choose to expand in the future, the        
Company may need to enter into a joint venture or other strategic relationship  
with one or more third parties in order to successfully conduct its operations  
(possibly with an ITO or other dominant carrier). There can be no assurance     
that such factors will not have a material adverse effect on the Company's      
future operations and, consequently, on the Company's business, results of      
operations and financial condition, or that the Company will not have to        
modify its current business practices. In addition, there can be no assurance   
that laws or administrative practices relating to taxation, foreign exchange    
or other matters of countries within which the Company operates will not        
change. Any such change could have a material adverse effect on the Company's   
business, financial condition, and results of operations.                       

As a result of the Offering, the Company will become subject to the Foreign 
Corrupt Practices Act ("FCPA"), which generally prohibits U.S. companies and    
their intermediaries from bribing foreign officials for the purpose of          
obtaining or keeping business. The Company may be exposed to liability under    
the FCPA as a result of past or future actions taken without the Company's      
knowledge by agents, strategic partners and other intermediaries. Such          
liability could have a material adverse effect on the Company's business,       
financial condition and results of operations.                                  

FOREIGN EXCHANGE RATE RISKS; REPATRIATION RISKS                                 

Although the Company and its Subsidiaries attempt to match costs and        
revenues in terms of local currencies, the Company anticipates that as it       
continues its expansion of the TIGN on a global basis, there will be many       
instances in which costs and revenues will not be matched with respect to       
currency denomination. As a result, the Company anticipates that increasing     
portions of its revenues, costs, assets and liabilities will be subject to      
fluctuations in foreign currency valuations, and that such changes in exchange  
rates may have a material adverse effect on the Company's business, financial   
condition and results of operations. While the Company may utilize foreign      
currency forward contracts or other currency hedging mechanisms to minimize     
exposure to currency fluctuation, there can be no assurance that such hedges    
will be implemented, or if implemented, will achieve the desired effect. The    
Company may experience economic loss and a negative impact on earnings solely   
as a result of foreign currency exchange rate fluctuations. The markets in      
which the Company's Subsidiaries now conduct business, except for South         
Africa, generally do not restrict the removal or conversion of the local or     
foreign currency; however, there can be no assurance that this situation will   
continue. The Company has formed a Subsidiary in South Africa which is          
authorized to handle such repatriation functions on the Company's behalf in     
accordance with applicable laws. See "--Risks Associated with International     
Operations."                                                                    

FAILURE TO COLLECT RECEIVABLES (BAD DEBT RISK)                                  

Many of the countries in which the Company operates do not have established 
credit bureaus, thereby making it more difficult for the Company to ascertain   
the creditworthiness of potential customers. In addition, the Company expends   
considerable resources to collect receivables from customers who fail to make   
payment in a timely manner. While the Company continually seeks to minimize     
bad debt, the Company's experience indicates that a certain portion of past     
due receivables will never be collected and that such bad debt is a necessary   
cost of conducting business in the telecommunications industry. Expenses        
attributable to the write-off of bad debt, including an estimate of accounts    
receivable expected to be written off, represented approximately 1.5%, 3.1%     
and 2.4% of revenues for the years ended December 31, 1994, 1995 and 1996,      
respectively, and 2.7% for the nine months ended September 30, 1997. There can  
be no assurance, however, that, with regard to                                  

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any particular time period or periods or a particular geographic location or    
locations, bad debt expense will not rise significantly above historical or     
anticipated levels. Any significant increase in bad debt levels could have a    
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

The telecommunications industry has historically been a victim of fraud.    
Although the Company has implemented anti-fraud measures to minimize losses     
relating to fraudulent practices, there can be no assurance that the Company    
can effectively control fraud when operating in the international or national   
telecommunications arena. The Company's failure to effectively control fraud    
could have a material adverse effect on the Company's business, financial       
condition and results of operations.                                            

RISKS ASSOCIATED WITH IMPOSITION OF VAT ON COMPANY'S SERVICES                   

The EU imposes value-added taxes ("VAT") upon the sale of goods and services
within the EU. The rate of VAT varies among EU members, but ranges from 15% to  
25% of the sales price of goods and services. Under basic VAT rules,            
businesses are required to collect VAT from their customers upon the sale to    
such customers of goods and services and remit such amounts to the VAT          
authorities.                                                                    

In the case of services, VAT is imposed only where services are deemed to   
have been provided within an EU member state. Pursuant to the Sixth VAT         
Directive adopted in 1977 (the "Sixth Directive"), telecommunications services  
were deemed to be provided where the supplier of such services is located.      
Under the Sixth Directive, therefore, telecommunications services provided by   
U.S. telecommunications companies in the United States were deemed to be        
performed outside the EU and were exempt from VAT. Because telecommunications   
providers based in the EU had to charge VAT on telecommunications services      
they provided, U.S.-based and other non-EU based telecommunications providers   
historically enjoyed a competitive advantage over their EU counterparts under   
the Sixth Directive.                                                            

Derogation to the Sixth Directive. In March 1997, the EU issued a derogation
to the Sixth Directive (the "Derogations") that, as of January 1, 1997,         
authorized individual EU states to amend their laws so as to change the locus   
of telecommunications services provided by non-EU based firms, treating such    
services as being provided where the customer is located rather than where the  
telecommunications provider is established. In the case of sales by non-EU      
based telecommunications companies to non-VAT-registered (usually residential)  
customers in EU member states, the Derogation provides that the non-EU based    
companies will be required to collect, charge, and remit VAT.                   

Germany and France have adopted rules that, as of January 1, 1997, deem     
telecommunications services provided by non-EU based firms to be provided       
where the customer is located, thereby subjecting telecommunications services   
provided to customers in the EU by non-EU based companies to VAT. The German    
and French rules impose VAT on both individual and business customers of non-   
EU based telecommunications companies. In the case of sales to individuals (as  
opposed to business), German and French rules require that the non-EU based     
telecommunications carriers collect and remit the VAT. In the case of sales by  
such providers to German business customers, the German rules generally         
require that such customers collect and remit the VAT. Under the so-called      
"Nullregelung" doctrine, however, certain German business customers that are    
required to charge VAT on goods and services provided to their customers        
(generally, companies other than banks and insurance companies) are exempt      
from the aforesaid obligation with regard to certain services. The exemption    
only applies if the provider has not invoiced VAT and the respective customer   
would be entitled to be fully reimbursed for VAT paid if such VAT had been      
invoiced. In the case of sales by such providers to French VAT-registered       
customers, the French rules require that such business customers collect and    
remit the VAT.                                                                  

Since April 1, 1997, Austria, Belgium, Denmark, Finland, Greece, Ireland,   
Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United      
Kingdom have begun to impose VAT on telecommunications services provided by     
non-EU based companies. The rules adopted by these countries are generally      
similar to those adopted by France and Germany in that they impose VAT on both  
individuals and businesses, with non-EU based telecommunications providers      
required to collect and remit the VAT in the case                               

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of sales to non-VAT-registered customers and the customer required to collect   
and remit VAT in the case of sales to VAT-registered customers.                 

Proposed Amendment to the Sixth Directive. The EU has adopted a proposed    
amendment to the Sixth Directive (the "Amendment") that, if adopted in present  
form, would require all EU members to adopt legislation to impose VAT on non-   
EU based telecommunications services provided to customers in the EU by non-EU  
based companies, beginning as early as December 31, 1998. Under the Amendment,  
non-EU based telecommunications companies would be required to collect and      
remit VAT on telecommunications services provided to EU businesses as well as   
to individuals.                                                                 

To the extent that the Company's services are, and in the future become,    
subject to VAT, the Company's competitive price advantage with respect to       
those EU businesses and other customers required to pay VAT will be reduced.    
Such reduction could have a material adverse effect on the Company's business,  
financial condition and results of operations. The Company historically has     
collected, and will continue to collect, VAT on Global Access Direct services   
where it is offered in a VAT country. In addition, the Company's U.K.           
Subsidiary acts as the provider of call-reorigination services throughout much  
of Europe and collects U.K. VAT, where applicable, on such services. The        
Company believes that whatever negative impact the Derogations and the          
Amendment will have on its operations as a result of the imposition of VAT on   
traditional call-reorigination, such impact will be partially mitigated by the  
customer migration towards and the higher gross margins associated with call-   
through services and by the fact that call-reorigination services offered by    
the Company's U.K. Subsidiary are imposed at the relatively low U.K. rate of    
17.5%.                                                                          

DEPENDENCE ON KEY PERSONNEL                                                     

The Company's success depends to a significant degree upon the continued    
contributions of its management team, as well as its technical, marketing and   
sales personnel. While certain of the Company's employees have entered into     
employment agreements with the Company, the Company's employees may             
voluntarily terminate their employment with the Company at any time. The        
Company has obtained a $5 million key man life insurance policy covering Mr.    
Cliff Rees, the Company's Chief Executive Officer and President, but there can  
be no assurance that the coverage provided by such policy will be sufficient    
to compensate the Company for the loss of Mr. Rees' services. The Company's     
success also will depend on its ability to continue to attract and retain       
qualified management, marketing, technical and sales personnel. The process of  
locating such personnel with the combination of skills and attributes required  
to carry out the Company's strategies is often lengthy. Competition for         
qualified employees and personnel in the telecommunications industry is         
intense. There can be no assurance that the Company will be successful in       
attracting and retaining such executives and personnel. The loss of the         
services of key personnel, including Mr. Rees, or the inability to attract      
additional qualified personnel, could have a material adverse effect on the     
Company's business, financial condition and results of operations. See          
"Management."                                                                   

PROTECTION OF PROPRIETARY TECHNOLOGY AND INFORMATION                            

The Company relies on trade secrets, know-how and continuing technological  
advancements to maintain its competitive position. The Company also relies on   
unpatented proprietary technology and there can be no assurance that third      
parties may not independently develop the same or similar technology or         
otherwise obtain access to the Company's unpatented technology, trade-secrets   
and know-how. Although the Company has entered into confidentiality and         
invention agreements with certain of its employees and consultants, no          
assurance can be given that such agreements will be honored or that the         
Company will be able to protect effectively its rights to its unpatented        
technology, trade secrets and know-how. Moreover, no assurance can be given     
that others will not independently develop substantially equivalent             
proprietary information and techniques or otherwise gain access to the          
Company's trade secrets and know-how. If the Company is unable to maintain the  
proprietary nature of its technologies, the Company could be materially         
adversely affected.                                                             

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Competitors in both the United States and foreign countries, many of which  
have substantially greater resources and have made substantial investments in   
competing technologies, may have applied for or obtained, or may in the future  
apply for and obtain, patents that will prevent, limit or otherwise interfere   
with the Company's ability to sell its services. The Company has not conducted  
an independent review of patents issued to third parties. Although the Company  
believes that its products do not infringe on the patents or other proprietary  
rights of third parties, there can be no assurance that other parties will not  
assert infringement claims against the Company or that such claims will not be  
successful. An adverse outcome in the defense of a patent suit could subject    
the Company to significant liabilities to third parties, require disputed       
rights to be licensed from third parties or require the Company to cease        
selling its services.                                                           

CONTROL OF COMPANY BY PRINCIPAL SHAREHOLDERS                                    

As of September 30, 1997, Fred Gratzon, the Chairman of the Board, and      
Clifford Rees, the Chief Executive Officer, collectively beneficially owned in  
the aggregate approximately 76.5% of the then outstanding Common Stock.         
Accordingly, if they choose to do so, Messrs. Gratzon and Rees acting together  
will have the power to amend the Company's Second Restated Articles of          
Incorporation, elect all of the directors, effect fundamental corporate         
transactions such as mergers, asset sales and the sale of the Company and       
otherwise direct the Company's business and affairs, without the approval of    
any other shareholder. See "Management" and "Principal Shareholders."           

RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES         

In furtherance of its business strategy, the Company may enter into         
strategic alliances with, acquire assets or businesses from, or make            
investments in, companies that are complementary to its current operations.     
While the Company is currently engaged in negotiations to acquire the           
operations and customer base of its Country Coordinators in Australia, the      
Netherlands and New Zealand, the Company has no present agreements with         
respect to any such strategic alliance, investment or acquisition. Any such     
future strategic alliances, investments or acquisitions would be accompanied    
by the risks commonly encountered in such transactions. Such risks include,     
among other things, the difficulty of assimilating the operations and           
personnel of the companies, the potential disruption of the Company's ongoing   
business, costs associated with the development and integration of such         
operations, the inability of management to maximize the financial and           
strategic position of the Company by the successful incorporation of licensed   
or acquired technology into the Company's service offerings, the maintenance    
of uniform standards, controls, procedures and policies, the impairment of      
relationships with employees and customers as a result of changes in            
management, and higher customer attrition with respect to customers obtained    
through acquisitions.                                                           

FORWARD-LOOKING STATEMENTS                                                      

Certain statements contained in this Prospectus, including, without         
limitation, statements containing the words "believes," "anticipates,"          
"intends," "expects" and words of similar import, constitute "forward-looking   
statements." Such forward-looking statements involve known and unknown risks,   
uncertainties and other factors that may cause the actual results, performance  
or achievements of the Company or the global long distance telecommunications   
industry to be materially different from any future results, performance or     
achievements expressed or implied by such forward-looking statements. Such      
factors include, among others, the following: general economic and business     
conditions; prospects for the global long distance telecommunications           
industry; competition; changes in business strategy or development plans; the   
loss of key personnel; the availability of capital; regulatory developments     
and other factors referenced in this Prospectus, including, without             
limitation, under the captions "Prospectus Summary," "Recent Developments,"     
"Risk Factors," "Management's Discussion and Analysis of Financial Condition    
and Results of Operations" and "Business." Given these uncertainties,           
prospective investors are cautioned not to place undue reliance on such         
forward-looking statements. The Company disclaims any obligation to update any  
such factors or to publicly announce the results of any revisions to any of     
the forward-looking statements contained herein to reflect future events or     
developments.                                                                   

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USE OF PROCEEDS 

The Company will not receive any of the proceeds from the sale of Common    
Stock by the Selling Shareholders.                                              

DIVIDEND POLICY 

The Company declared a $525,000 cash dividend in December 1995 and a        
$425,000 cash dividend in March 1996, both of which were paid in November 1996  
to the Company's shareholders. The Company currently intended to retain all     
future earnings for use in the operation of its business and, therefore, does   
not anticipate paying any cash dividends in the foreseeable future. The         
declaration and payment in the future of any cash dividends will be at the      
discretion of the Company's Board of Directors and will depend upon among       
other things, the earnings, capital requirements and financial position of the  
Company, exisiting and/or future loan covenants and general economic            
conditions. Under the terms of the Credit Facility, the Company is restricted   
from declaring, making or paying any distributions unless certain financial     
covenants are met. See "Management's Discussion and Analysis of Financial       
Condition and Results of Operations--Liquidity and Capital Resources."          

MARKET FOR THE COMMON EQUITY  
AND RELATED STOCKHOLDER MATTERS 

PRICE RANGE OF COMMON STOCK                                                     

The Common Stock was initially offered to the public on July 9, 1997 at a   
price of $10.00 per share and commenced trading on the Nasdaq National Market   
on that date under the symbol "TGRP." The following table sets forth, for the   
calendar period indicated, the high and low sale prices per share for the       
Common Stock, as reported on the Nasdaq National Market. These prices do not    
include retail markups, markdowns or commissions.                               

                                                                [Download Table]

        CALENDAR YEAR 1997                                  HIGH       LOW     
        ------------------                                 -------    ------   
                                                                               
Third Quarter, July 9-September 30, 1997.................. $   13 3/4 $   8 7/8
Fourth Quarter, November 1-December 17, 1997.............. $13.125    $9 3/4   

On December 17, 1997, the last sale price of the Common Stock as reported by
Nasdaq NMS was $12.9375 per share. As of December  , 1997, there were           
approximately     shareholders of record.                                       

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CAPITALIZATION  

The following table sets forth the cash and cash equivalents and            
capitalization of the Company (i) as of September 30, 1997, and (ii) as         
adjusted to give effect to the offering of the Senior Discount Notes as if      
such transaction had occurred on September 30, 1997. See "Selected Financial    
Data," "Management's Discussion and Analysis of Financial Condition and         
Results of Operations" and the Company's consolidated financial statements and  
notes thereto included elsewhere in this Prospectus.                            

                                                                [Download Table]

                                                  AS OF SEPTEMBER 30, 1997     
                                               --------------------------------
                                                ACTUAL        AS ADJUSTED      
                                               --------  ----------------------
                                                         (DOLLARS IN THOUSANDS)
                                                                               
Cash and cash equivalents..................... $ 58,215         $130,025       
                                               ========         ========       
Current portion of long term debt and capital                                  
 lease obligations............................      219              219       
                                               ========         ========       
Long-term debt, net of current portion:                                        
  10 1/2% Senior Discount Notes due 2004......      --            74,933       
  Convertible Notes...........................   25,000           25,000       
  Other long term debt........................       42               42       
  Capital lease obligations...................      218              218       
                                               --------         --------       
    Total long-term debt......................   25,260          100,193       
Shareholders' equity:                                                          
  Preferred Stock, no par value; 10,000,000                                    
   shares authorized; no shares issued or out-                                 
   standing...................................      --               --        
  Common Stock, no par value; 150,000,000                                      
   shares authorized; 30,768,542 shares issued                                 
   and outstanding(1).........................      --               --        
Additional paid-in capital....................   51,405           51,405       
Retained earnings (deficit)...................  (10,483)         (10,483)      
                                               --------         --------       
  Total shareholders' equity..................   40,922           40,922       
                                               ========         ========       
    Total capitalization...................... $ 66,182         $141,115       
                                               ========         ========       

--------                                                                        
(1) Excludes (i) 1,677,153 shares of Common Stock issuable upon the exercise    
of options granted under the Stock Option Plan as of September 30, 1997;
(ii) 2,322,847 shares of Common Stock issuable upon the exercise of     
options available for grant under the Stock Option Plan as of September 
30, 1997; and (iii) 1,160,107 shares of Common Stock issuable upon the  
exercise of the Warrants as of September 30, 1997. See "Management--    
Amended and Restated Stock Option Plan" and "Description of Capital     
Stock--Warrants."                                                       

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SUMMARY FINANCIAL DATA  

The following table sets forth certain consolidated financial information   
for the Company for (i) the years ended December 31, 1994, 1995 and 1996,       
which have been derived from the Company's audited consolidated financial       
statements and notes thereto included elsewhere in this Prospectus, (ii) the    
year ended December 31, 1993, which has been derived from audited consolidated  
financial statements of the Company which are not included herein, and (iii)    
the year ended December 31, 1992, which has been derived from unaudited         
consolidated financial statements which are not included herein. The summary    
financial data as of September 30, 1997 and for the nine months ended           
September 30, 1996 and 1997 has been derived from the unaudited consolidated    
financial statements for the Company included elsewhere in this Prospectus. In  
the opinion of management, the unaudited consolidated financial statements      
have been prepared on the same basis as the audited consolidated financial      
statements and include all adjustments, which consist only of normal recurring  
adjustments, necessary for a fair presentation of the financial position and    
the results of operations for these periods. The "As Adjusted" financial        
information is not necessarily indicative of the Company's financial position   
or the results of operations that actually would have occurred if the           
transactions described herein had occurred on the dates indicated or for any    
future period or date. The adjustments give effect to available information     
and assumptions that the Company believes are reasonable. The following         
financial information should be read in conjunction with "Selected Financial    
Data" and "Management's Discussion and Analysis of Financial Condition and      
Results of Operations" and the Company's consolidated financial statements and  
notes thereto appearing elsewhere herein.                                       

                                                        [Enlarge/Download Table]

                                                                               YEAR                         NINE MONTHS 
                                                                              ENDED        NINE MONTHS         ENDED    
                                                                           DECEMBER 31,       ENDED        SEPTEMBER 30,
                                     YEAR ENDED DECEMBER 31,               AS ADJUSTED    SEPTEMBER 30,     AS ADJUSTED 
                          -----------------------------------------------  ------------ -----------------  -------------
                             1992      1993     1994      1995     1996      1996(1)      1996     1997       1997(2)   
                          ----------- -------  -------  -------- --------  ------------ -------- --------  -------------
                          (UNAUDITED)                                                      (UNAUDITED)                  
                                            (IN THOUSANDS, EXCEPT RATIOS AND OTHER OPERATING DATA)                      
                                                                                                                        
STATEMENT OF OPERATIONS DATA:                                                                                           
Revenues:                                                                                                               
 Retail.................    $23,846   $29,790  $68,714  $128,139 $179,147    $179,147   $128,828 $169,720    $169,720   
 Wholesale..............        --        --       --        980   34,061      34,061     18,951   68,758      68,758   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
 Total revenues.........     23,846    29,790   68,714   129,119  213,208     213,208    147,779  238,478     238,478   
Cost of revenues........     18,411    22,727   49,513    83,101  150,537     150,537    100,794  174,273     174,273   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
 Gross profit...........      5,435     7,063   19,201    46,018   62,671      62,671     46,985   64,205      64,205   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
Operating expenses:                                                                                                     
 Selling, general and                                                                                                   
  administrative........      3,935     7,341   19,914    39,222   59,652      59,652     42,648   63,174      63,174   
 Depreciation and                                                                                                       
  amortization..........         61       172      301       655    1,882       2,415      1,158    3,208       3,480   
 Stock option based                                                                                                     
  compensation..........        --        --       --        --     1,032       1,032        --       257         257   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
 Total operating                                                                                                        
  expenses..............      3,996     7,513   20,215    39,877   62,566      63,099     43,806   66,639      66,911   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
 Operating income                                                                                                       
  (loss)................      1,439      (450)  (1,014)    6,141      105        (428)     3,179   (2,434)     (2,706)  
 Interest expense.......         88        47      112       121      579      10,178        200    2,135       7,540   
 Extraordinary item,                                                                                                    
  loss on extinguishment                                                                                                
  of debt, net of income                                                                                                
  taxes.................        --        --       --        --       --          --         --     9,971      10,473   
                            -------   -------  -------  -------- --------    --------   -------- --------    --------   
 Net earnings (loss)....      1,386      (707)    (538)    3,821     (118)     (7,661)     2,050  (12,820)    (17,633)  
                            =======   =======  =======  ======== ========    ========   ======== ========    ========   

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                                                        [Enlarge/Download Table]

                                                                           YEAR                       NINE MONTHS 
                                                                          ENDED      NINE MONTHS         ENDED    
                                                                       DECEMBER 31,     ENDED        SEPTEMBER 30,
                                   YEAR ENDED DECEMBER 31,             AS ADJUSTED  SEPTEMBER 30,     AS ADJUSTED 
                          -------------------------------------------  ------------ ---------------  -------------
                             1992      1993    1994    1995    1996      1996(1)     1996    1997       1997(2)   
                          ----------- ------  ------  ------  -------  ------------ ------  -------  -------------
                          (UNAUDITED)                                                (UNAUDITED)                  
                                        (IN THOUSANDS, EXCEPT RATIOS AND OTHER OPERATING DATA)                    
                                                                                                                  
Per share amounts(8):                                                                                             
 Earnings (loss) before                                                                                           
  extraordinary item....    $  .05      (.02)   (.02)    .13     (.00)      (.23)      .07     (.10)      (.26)   
 Net earnings (loss)....    $  .05      (.02)   (.02)    .13     (.00)      (.23)      .07     (.47)      (.64)   
 Weighted-average                                                                                                 
  shares................    28,785    28,785  28,785  28,785   28,785     33,235    28,785   27,462     27,462    
OTHER FINANCIAL DATA:                                                                                             
EBITDA(3)...............    $1,510    $ (278) $ (577) $6,994  $ 2,990               $4,341  $   602               
Net cash provided by                                                                                              
 (used in) operating                                                                                              
 activities.............       820       924   1,364   5,561    4,904                4,083   (1,002)              
Net cash (used in)                                                                                                
 investing activities...      (667)     (765)   (700) (2,818) (11,262)              (8,261) (13,325)              
Net cash (used in)                                                                                                
 provided by financing                                                                                            
 activities.............        21       (10)    957    (115)  15,924                3,877   58,648               
Ratio of earnings to                                                                                              
 fixed charges(4).......     15.18       --      --    29.76      .84        .26     10.44      --         --     
Capital expenditures....       291       449   1,056   2,652    9,068                6,264   12,463               
Dividends declared per                                                                                            
 common share...........       --        --      --      .02      .02                  .02      --                
OTHER OPERATING DATA (AT                                                                                          
 PERIOD END):                                                                                                     
Retail customers(5):                                                                                              
 Domestic (US)..........     8,261     7,021  16,733  17,464   34,294                        48,785               
 International..........         0     5,301  28,325  56,156  109,922                       167,444               
Wholesale customers(6)..         0         0       0       4       18                            26               
Number of employees.....        54        97     217     296      444                           576               
Number of switches......         0         1       2       3        7                            19               
                                                                [Download Table]

                                                        AS OF SEPTEMBER 30, 1997
                                                        ------------------------
                                                         ACTUAL  AS ADJUSTED (7)
                                                        -------- ---------------
                                                              (UNAUDITED)       
                                                             (IN THOUSANDS)     
                                                                                
BALANCE SHEET DATA:                                                             
Cash and cash equivalents.............................. $ 58,215    $130,025    
Working capital........................................   39,035     110,845    
Property & equipment, net..............................   21,597      21,597    
Total assets...........................................  139,658     214,590    
Long term debt, less current portion...................   25,042      99,975    
Total shareholders' equity.............................   40,922      40,922    

-------                                                                         
(1) Adjusted to give effect to the issuance of the Convertible Notes, the       
offering of Senior Discount Notes and the elimination of interest and   
amortization expense for the Senior Subordinated Notes as if such       
  transactions had occurred on January 1, 1996. As adjusted interest expense
reflects (i) approximately $2.0 million on the Convertible Notes for the
  year ended December 31, 1996, and approximately $7.9 million on the Senior
   Discount Notes for the year ended December 31, 1996 (ii) the elimination of
$0.3 million with respect to the Senior Subordinated Notes, for the year
  ended December 31, 1996 (iii) amortization of fees and costs totaling $0.5
million relating to the Convertible Notes and the offering of Senior    
Discount Notes for the year ended December 31, 1996 using amortization  
  periods equal to the term of the respective issuances (iv) the elimination
 of $0.01 million of amortization of fees and costs relating to the Senior
Subordinated Notes for the year ended December 31, 1996 and (v) the     
 4,450,00 shares issued in connection with the initial public offering and
the underwriters' overallotment option. Interest income has not been    
adjusted to reflect interest earned on additional available cash.       
(2) Adjusted to give effect to the issuance of the Convertible Notes, the       
offering of Senior Discount Notes and the elimination of interest and   
amortization expense for the Senior Subordinated Notes as if such       
  transactions had occurred on January 1, 1997. As adjusted interest expense
reflects (i) approximately $1.5 million on the Convertible Notes for the
   nine-months ended September 30, 1997, and approximately $5.9 million on the
Senior Discount Notes for the nine-months ended September 30, 1997, (ii)
the elimination of $2.0 million with respect to the Senior Subordinated 
  Notes, for the nine-months ended September 30, 1997, (iii) amortization of
fees and                                                                

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costs totaling $0.4 million relating to the Convertible Notes and the   
 offering of Senior Discount Notes for the nine-months ended September 30,
1997 using amortization periods equal to the term of the respective     
  issuances and (iv) the elimination of $0.1 million of amortization of fees
and costs relating to the Senior Subordinated Notes for the nine-months 
  ended September 30, 1997. Interest income has not been adjusted to reflect
interest earned on additional available cash. Adjusted also reflects the
  additional loss of $0.5 million (net of tax) on the extinguishment of debt
as if such transaction had occurred on January 1, 1997.                 
(3) EBITDA represents net earnings (loss) plus net interest expense (income),   
income taxes, depreciation and amortization, non-cash stock option based
compensation and the extraordinary item, loss on extinguishment of debt.
  While EBITDA is not a measurement of financial performance under generally
  accepted accounting principles and should not be construed as a substitute
for net earnings (loss) as a measure of performance, or cash flow as a  
measure of liquidity, it is included herein because it is a measure     
commonly used in the telecommunications industry.                       
(4) The ratio of earnings to fixed charges was computed by dividing earnings    
by fixed charges. For this purpose, earnings consist of income from     
continuing operations, before income taxes and fixed charges of the     
Company and its subsidiaries. Fixed charges consist of the Company's and
its subsidiaries' interest expense and the portion of rent expense      
representative of an interest factor. For the years ended December 31,  
1993, 1994, 1996, 1996 as adjusted, and for the nine months ended       
September 30, 1997, and September 30, 1997 as adjusted, earnings were   
inadequate to cover fixed charges. The dollar amount of the coverage    
deficiency was $436,891, $886,700, $125,770, $10,258,419, $4,214,912 and
$9,892,150, respectively.                                               
(5) Consists of retail customers who received invoices for the last month of    
 the period indicated. Does not include active international customers who
 incurred charges in such month but who had outstanding balances as of the
last day of such month of less than $50, as the Company does not render 
invoices in such instances.                                             
(6) Consists of wholesale customers who received invoices for the last month    
of the period indicated.                                                
(7) Adjusted to give effect to the offering of the Senior Discount Notes as if  
such transaction had occurred on September 30, 1997.                    
(8) Earnings per common and common equivalent share have been computed using    
the weighted-average number of shares of common stock outstanding during
each period as adjusted for the effects of Securities and Exchange      
Commission Staff Accounting Bulletin No. 83. Accordingly, options and   
  warrants to purchase common stock granted within one year of the Company's
initial public offering, which had exercise prices below the initial    
 public offering price per share, have been included in the calculation of
  common equivalent shares, using the treasury stock method, as if they were
outstanding for all periods presented. For the nine-month period ended  
September 30, 1997 and as adjusted, earnings per common share have been 
computed under the provisions of Accounting Principles Board Opinion No.
  15, "Earnings Per Share." Common stock equivalents, which includes options
  and convertible subordinated notes, are not included in the loss per share
calculation as their effect is anti-dilutive.                           

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

The following discussion of the financial condition and performance of the  
Company should be read in conjunction with the consolidated financial           
statements and related notes and other detailed information regarding the       
Company included elsewhere in this Prospectus. Certain information contained    
below and elsewhere in this Prospectus, including information with respect to   
the Company's plans and strategy for its business, are forward-looking          
statements. See "Risk Factors" for a discussion of important factors which      
could cause actual results to differ materially from the forward-looking        
statements contained herein.                                                    

OVERVIEW                                                                        

Telegroup is a leading global provider of long distance telecommunications  
services. The Company offers a broad range of discounted international,         
national, value-added wholesale and enhanced telecommunications services to     
approximately 268,000 small and medium-sized business and residential           
customers in over 180 countries worldwide. Telegroup has achieved its           
significant international market penetration by developing what it believes to  
be one of the most comprehensive global sales, marketing and customer service   
organizations in the global telecommunications industry. The Company operates   
a reliable, flexible, cost-effective, digital, switched-based network, the      
Telegroup Intelligent Global Network or the TIGN, consisting of 19 Excel,       
NorTel or Harris switches, five enhanced service platforms, owned and leased    
capacity on seven digital fiber-optic cable links, leased parallel data         
capacity and the Company's Network Operations Center in Fairfield, Iowa.        
According to FCC statistics based on 1996 revenue, Telegroup was the            
thirteenth largest U.S. long distance carrier in 1996. Telegroup's revenues     
have increased from $29.8 million in 1993 to $303.9 million for the 12 months   
ended September 30, 1997. In 1993, the Company had an operating loss of $0.5    
million and a net loss of $0.7 million, compared to operating income of $0.1    
million and a net loss of $0.1 million in 1996.                                 

Incorporated in 1989, Telegroup was one of the first resellers of AT&T's    
Software Defined Network and Distributed Network Service long distance          
services. The Company derived its initial growth by aggregating long distance   
services to individuals and small businesses in the U.S. in order to fulfill    
large volume commitments to AT&T. In early 1993, Telegroup initiated call       
reorigination service in certain countries in Western Europe and the Pacific    
Rim. By 1994, more than one half of Telegroup's retail customers were located   
outside the United States. At September 30, 1997, the Company had               
approximately 49,000 active retail customers within the United States and       
approximately 167,000 active retail customers outside the United States. The    
Company's network currently includes switches located in Australia, Denmark,    
France, Germany, Hong Kong, Italy, Japan, the Netherlands, Switzerland the      
U.K. and the U.S. and leased and owned transmission facilities, and enables     
the Company to offer a variety of enhanced telecommunications services.         

The Company has attained positive EBITDA (as defined in "Selected Financial 
Data") and net earnings in only two of the last five years--1992 and 1995. The  
Company expects to incur lower gross margins, negative EBITDA and significant   
operating losses and net losses for the near term as it incurs additional       
costs associated with the development and expansion of the TIGN, the expansion  
of its marketing and sales organization, and the introduction of new            
telecommunications services. As the development and expansion of the TIGN       
continues and the Company's customers migrate from Global Access CallBack to    
Global Access Direct service, the Company expects that its gross margins,       
EBITDA, and operating and net income will improve. However there can be no      
assurance that this will be the case. See "Risk Factors--Historical and         
Anticipated Losses; Uncertainty of Future Profitability."                       

Telegroup's revenues are derived from the sale of telecommunications        
services to retail customers, typically residential users and small to medium-  
sized businesses in over 180 countries worldwide and to wholesale customers,    
typically other U.S. and non-U.S. telecommunications carriers. The Company's    
revenues from retail and wholesale customers represented 84% and 16%,           
respectively, of the Company's total revenues for the year ended December 31,   
1996 and 71% and 29%, respectively, for the nine months ended September 30,     
1997. The                                                                       

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Company's retail customer base is diversified both geographically and by        
customer type. No single retail customer accounted for more than 1% of the      
Company's total revenues for the year ended December 31, 1996 and for the nine  
months ended September 30, 1997. Revenues from the Company's wholesale          
customers have grown from $1.0 million in 1995, the first year in which the     
Company derived revenues from wholesale customers, to $34.1 million for the     
year ended December 31, 1996. For the nine months ended September 30, 1997,     
one wholesale customer in Hong Kong, New T&T Hong Kong Limited, accounted for   
approximately 12% of the Company's total revenues. See "Business--Customers."   
The Company expects that wholesale revenues will continue to grow as a          
percentage of total telecommunications revenue in the near term.                

The FCC has adopted certain measures to implement the 1996                  
Telecommunications Act that will impose new regulatory requirements, including  
the requirement that the Company contribute some portion of its                 
telecommunications revenues to a "universal service fund" designated to fund    
affordable telephone service for consumers, schools, libraries and rural        
healthcare providers. These contributions will become payable beginning in      
1998 for all interexchange carriers. Although the FCC has not determined the    
precise amount of the contribution, the Company estimates at this time that it  
will constitute approximately 4% of its gross revenues from domestic end-user   
customers. It is currently anticipated that the Company will increase its       
rates to offset such contribution.                                              

The following chart sets forth the Company's combined retail and wholesale  
revenues for the nine months ended September 30, 1997 for each of the           
Company's ten largest markets, determined by customers' billing addresses:      

                                                                [Download Table]

                                                  NINE MONTHS                
                                                     ENDED                   
                                                 SEPTEMBER 30,               
                                                     1997                    
                                                   REVENUES    PERCENTAGE OF 
COUNTRY                                           (MILLIONS)   TOTAL REVENUES
-------                                          ------------- --------------
                                                                             
United States...................................     $81.5          34.2%    
Hong Kong.......................................      35.0          14.7     
Netherlands.....................................      18.2           7.6     
Australia.......................................      11.8           4.9     
France..........................................      11.1           4.7     
Switzerland.....................................       9.8           4.1     
Germany.........................................       8.1           3.4     
Sweden..........................................       6.5           2.7     
Japan...........................................       5.1           2.1     
Denmark.........................................       4.5           1.9     

During the nine months ended September 30, 1997, the geographic origin of   
the Company's revenues was as follows: United States--34.2%; Europe--31.3%;     
Pacific Rim--24.5%; Other--10.0%                                                

During fiscal year 1996, the geographic origin of the Company's revenues was
as follows: United States--28.3%; Europe--38.1%; Pacific Rim--19.8%; Other--    
13.8%. The Company has developed its wholesale carrier business, which          
accounted for 28.8% of revenues for the nine months ended September 30, 1997    
compared to 12.8% for the nine months ended September 30, 1996, primarily by    
serving wholesale customers in the U.S. and the Pacific Rim. In addition, the   
Company has expanded its Country Coordinator offices and retail marketing       
activities primarily in its core markets, six of which are located in Western   
Europe, and three in the Pacific Rim. The Company believes that, because its    
core markets comprised approximately 64% of the total global long distance      
telecommunications market in 1996, according to TeleGeography, the U.S.,        
Europe, and Pacific Rim regions will continue to comprise the bulk of the       
Company's revenues.                                                             

The Company believes its retail services are typically competitively priced 
below those of the ITO in each country in which the Company offers its          
services. Prices for telecommunications services in many of the                 

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Company's core markets have declined in recent years as a result of             
deregulation and increased competition. The Company believes that worldwide     
deregulation and increased competition are likely to continue to reduce the     
Company's retail revenues per billable minute. The Company believes, however,   
that any decrease in retail revenues per minute will be at least partially      
offset by an increase in billable minutes by the Company's customers, and by a  
decreased cost per billable minute as a result of the expansion of the TIGN     
and the Company's ability to use least cost routing in additional markets. See  
"Risk Factors--Expansion and Operation of the TIGN."                            

For the year ended December 31, 1996 and the nine months ended September 30,
1997, 83.8% and 75.5%, respectively, of the Company's retail revenues were      
derived from Telegroup's Global Access CallBack services. As the Company's      
Global Access Direct service is provided to customers currently using           
traditional call-reorigination services, the Company anticipates that revenue   
derived from Global Access Direct will increase as a percentage of retail       
revenues. However, the Company expects to continue to aggressively market its   
Global Access CallBack service in markets not served by the TIGN and to use     
transparent call-reorigination as an alternative routing methodology for its    
Global Access Direct customers where appropriate. Accordingly, the Company      
believes that call-reorigination will continue to be a significant source of    
revenue.                                                                        

Historically, the Company has not been required to collect VAT (typically   
15% to 25% of the sales price) on call-reorigination services provided to       
customers in the EU because prior laws deemed such services to be provided      
from the U.S. However, Germany and France have adopted rules whereby, as of     
January 1, 1997, telecommunications services provided by non-EU based firms     
are deemed to be provided where the customer is located. Since April 1, 1997,   
Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, Luxembourg, Spain,  
the Netherlands, Portugal, Sweden and the United Kingdom have begun to impose   
VAT on telecommunications services provided by non-EU based companies. The      
Company is currently analyzing the effect of this legislation on its service    
offerings. The Company may have no alternative but to reduce prices of          
particular services offered to certain customer segments in order to remain     
competitive in light of the imposition of VAT on its services in certain EU     
member states. Such price reduction could have a material adverse effect on     
the Company's business, financial condition and results of operations. The      
Company believes that whatever negative impact the imposition of VAT will have  
on its operations, such impact will be partially mitigated by the migration of  
customers towards and the higher gross margins associated with call-through     
services. See "Risk Factors--Risks Associated With Imposition of VAT on         
Company's Services."                                                            

Cost of retail and wholesale revenues is comprised of (i) variable costs    
associated with the origination, transmission and termination of voice and      
data telecommunications services by other carriers, and (ii) costs associated   
with owning or leasing and maintaining switching facilities and circuits. The   
Company also includes as a cost of revenues payments resulting from traffic     
imbalances under its operating agreement with AT&T Canada. Currently, a         
significant portion of the Company's cost of revenues is variable, based on     
the number of minutes of use transmitted and terminated over other carriers'    
facilities. The Company's gross profitability is driven mainly by the           
difference between revenues and the cost of transmission and termination        
capacity.                                                                       

The Company seeks to lower the variable portion of its cost of services by  
originating, transporting and terminating a higher portion of its traffic over  
the TIGN. However, in the near term, the Company expects that its cost of       
revenues as a percentage of revenues will increase as the Company continues     
the development and expansion of the TIGN and introduces new                    
telecommunications services. Subsequently, as the Company increases the volume  
and percentage of traffic transmitted over the TIGN, cost of revenues will      
increasingly consist of fixed costs associated with leased and owned lines and  
the ownership and maintenance of the TIGN, and the Company expects that the     
cost of revenues as a percentage of revenues will decline. The Company seeks    
to lower its cost of revenues by: (i) expanding and upgrading the TIGN by       
acquiring owned and leased facilities and increasing volume on these            
facilities, thereby replacing a variable cost with a fixed cost and spreading   
fixed costs over a larger number of minutes; (ii) negotiating lower cost of     
transmission over the facilities owned by other national and international      
carriers; and (iii) expanding the Company's least cost routing choices and      
capabilities.                                                                   

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The Company generally realizes higher gross margins from its retail services
than from its wholesale services. Wholesale services, however, provide a        
source of additional revenue and add significant minutes originating and        
terminating on the TIGN, thus enhancing the Company's purchasing power for      
leased lines and switched minutes and enabling it to take advantage of volume   
discounts. The Company also generally realizes higher gross margins from        
direct access services than from call-reorigination. The Company expects its    
gross margins to continue to decline in the near term as a result of increased  
wholesale revenues as a percentage of total revenues. In addition, the Company  
intends to reduce prices in advance of corresponding reductions in              
transmission costs in order to maintain market share while migrating customers  
from traditional call-reorigination to Global Access Direct. The Company then   
expects gross margins to improve as the volume and percentage of traffic        
originated, transmitted and terminated on the TIGN increases and cost of        
revenues is reduced. The Company's overall gross margins may fluctuate in the   
future based on its mix of wholesale and retail long distance services and the  
percentage of calls using direct access as compared to call-reorigination, any  
significant long distance rate reductions imposed by ITOs to counter external   
competition, and any risks associated with the Company agreeing to minimum      
volume contracts and not achieving the volume necessary to meet the             
commitments.                                                                    

Operating expenses include: (i) selling, general and administrative; (ii)   
depreciation and amortization; and (iii) stock option based compensation.       

Selling, general and administrative expenses include: (i) selling expenses; 
(ii) general and administrative expenses; and (iii) bad debt expense. Selling   
expenses are primarily sales commissions paid to internal salespersons and      
independent agents, the primary cost associated with the acquisition of         
customers by the Company. The Company's decision to use independent agents to   
date has been primarily driven by the low initial fixed costs associated with   
this distribution channel, and the agents' familiarity with local business and  
marketing practices. The Company strives to reduce its customer acquisition     
costs where possible by acquiring successful independent agents and by          
developing its internal sales and customer service operations in countries      
where there is sufficient market penetration. Sales commissions have increased  
over the past three years as the Company's business has expanded. The Company   
anticipates that, as revenues from the Company's Global Access Direct,          
Spectra, and wholesale carrier services increase relative to its existing       
services, selling expense will decline as a percentage of revenue, because of   
the generally lower commission structure associated with these services. See    
"Risk Factors--Dependence on Independent Agents; Concentration of Marketing     
Resources."                                                                     

The general and administrative expense component includes salaries and      
benefits, other corporate overhead costs and costs associated with the          
operation and maintenance of the TIGN. These costs have increased due to the    
development and expansion of the TIGN and corporate infrastructure. The         
Company expects that general and administrative expenses may increase as a      
percentage of revenues in the near term as the Company incurs additional costs  
associated with the development and expansion of the TIGN, the expansion of     
its marketing and sales organization, and the introduction of new               
telecommunications services.                                                    

The Company spends considerable resources to collect receivables from       
customers who fail to make payment in a timely manner. While the Company        
continually seeks to minimize bad debt, the Company's experience indicates      
that a certain portion of past due receivables will never be collected, and     
that such bad debt is a necessary cost of conducting business in the            
telecommunications industry. Expenses attributable to the write-off of bad      
debt represented approximately 1.5%, 3.1% and 2.4% of revenues for the years    
ended December 31, 1994, 1995 and 1996, respectively, and 2.7% for the nine     
months ended September 30, 1997. See "Risk Factors--Failure to Collect          
Receivables (Bad Debt Risk)." In addition to uncollectible receivables, the     
telecommunications industry has historically been exposed to a variety of       
forms of customer fraud. The TIGN and the Company's billing systems are         
designed to detect and minimize fraud, where practicable, and the Company       
continuously seeks to enhance and upgrade its systems in an effort to minimize  
losses as it expands into new markets. See "Risk Factors--Dependence on         
Effective Management Information Systems."                                      

As the Company begins to integrate its distribution network in selected     
strategic locations by acquiring Country Coordinators and independent agents    
or by establishing internal sales organizations, it may incur added             

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selling, general and administrative expenses associated with the transition     
which may result, initially, in an increase in selling, general and             
administrative expenses as a percentage of revenues. The Company anticipates,   
however, that as sales networks become fully integrated, new service offerings  
are implemented, and economies of scale are realized, selling, general and      
administrative expenses will decline as a percentage of revenue. See            
"Business--Market Opportunity" and "--Business Strategy."                       

Depreciation and amortization expense primarily consists of expenses        
associated with the depreciation of assets, amortization of goodwill derived    
from business combinations and the amortization of debt issuance costs          
associated with the private placement of the Company's Senior Subordinated      
Notes in November 1996.                                                         

Stock option based compensation expense results from the granting of certain
unqualified and performance based options to employees at exercise prices       
below that of fair market value at the date of grant or when specified          
performance criteria have been met. As a result of certain non-qualified stock  
option grants during 1996, the Company will incur stock option based            
compensation expense of $342,000 in 1997 and 1998, and $283,000 in 1999.        

RESULTS OF OPERATIONS                                                           

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

PERCENTAGE OF REVENUES                                                          

                                                                [Download Table]

                                                            NINE MONTHS ENDED  
                                 YEAR ENDED DECEMBER 31,      SEPTEMBER 30,    
                                 -----------------------    ------------------ 
                                  1994     1995     1996      1996      1997   
                                  ----     ----     ----      ----      ----   
                                                                               
Revenues.......................    100.0%   100.0%   100.0%    100.0%    100.0%
Cost of revenues...............     72.0     64.4     70.6      68.2      73.1 
Gross profit...................     28.0     35.6     29.4      31.8      26.9 
Operating expenses:                                                            
  Selling, general and                                                         
   administrative..............     29.0     30.4     28.0      28.9      26.5 
  Depreciation and                                                             
   amortization................      0.5      0.5      0.8       0.7       1.3 
  Stock option based                                                           
   compensation................      --       --       0.5       --        0.1 
    Total operating expenses...     29.5     30.9     29.3      29.6      27.9 
Operating income (loss)........     (1.5)     4.7      0.1       2.2      (1.0)
Income tax benefit (expense)...      0.5     (2.0)     0.0      (0.8)      0.6 
Extraordinary item, loss on                                                    
 extinguishment of debt, net of                                                
 income taxes..................      --       --       --        --        4.2 
Net earnings (loss)............     (0.8)     3.0     (0.1)      1.4      (5.4)

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER    
30, 1996                                                                        

Revenues. Revenues increased 61.4%, or $90.7 million, from $147.8 million in
the nine months ended September 30, 1996, to $238.5 in the nine months ended    
September 30, 1997. This increase was primarily due to growth in international  
and domestic retail sales and international and domestic wholesale revenues.    
Wholesale revenues increased from $19.0 million, or 12.9% of total revenues in  
the nine months ended September 30, 1996, to $68.8 million or 28.8% of          
revenues for the nine months ended September 30, 1997.                          

Cost of Revenues. Cost of revenues increased 72.9%, or $73.5, million, from 
approximately $100.8 million to approximately $174.3 million. As a percentage   
of revenues, cost of revenues increased from 68.2% to 73.1%, primarily as a     
result of a larger percentage of lower margin wholesale revenues.               

Operating Expenses. Operating expenses increased 52.1%, or $22.8 million,   
from $43.8 million in the nine months ended September 30, 1996, to $66.6        
million in the nine months ended September 30, 1997, primarily as               

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a result of increased sales commissions related to revenue growth, as well as   
an increase in the number of employees necessary to provide customer service,   
billing and collection and accounting support. Other contributing factors were  
bad debt, depreciation, and amortization, as discussed below. As a percentage   
of revenues, operating expenses decreased 1.7% from 29.6% in the nine months    
ended September 30, 1996, to 27.9% in the nine months ended September 30,       
1997.                                                                           

Bad Debt. Bad debt expense increased from $3.8 million, or 2.6% of revenues 
in the nine months ended September 30, 1996, to $6.4 million, or 2.7% of        
revenues, in the nine months ended September 30, 1997. The increase in bad      
debt expense as a percentage of revenues in the nine months ended September     
30, 1997, was due primarily to the write-off of accounts receivable for         
services rendered to a single domestic customer during the first quarter in     
the nine month period. Services to this customer have been discontinued.        

Depreciation and Amortization. Depreciation and amortization increased from 
$1.2 million in the nine months ended September 30, 1996, to $3.2 million in    
the nine months ended September 30, 1997, primarily due to increased capital    
expenditures incurred in connection with the development and expansion of the   
TIGN during the nine months ended September 30, 1997, as well as amortization   
expenses associated with intangible assets.                                     

Operating Income. Operating income decreased by $5.6 million, from $3.2     
million in the nine months ended September 30, 1996, to $(2.4) million in the   
nine months ended September 30, 1997, primarily as a result of the foregoing    
factors.                                                                        

Extraordinary Item. The Company recorded an extraordinary item, loss on     
extinguishment of debt, of approximately $10.0 million dollars, net of tax, in  
the third quarter of 1997 resulting from the prepayment of the Senior           
Subordinated Notes.                                                             

Net Earnings (Loss). Net earnings (loss) decreased approximately $14.8      
million, from $2.0 million in the nine months ended September 30, 1996, to      
$(12.8) million in the nine months ended September 30, 1997. The decrease was   
attributable to lower operating income, a $1.4 million increase in interest     
expense, a $0.5 million increase in foreign currency transaction losses and an  
extraordinary charge of $10.0 million for loss on early extinguishment of       
debt. The foreign currency transaction losses resulted primarily from a         
strengthening of the US Dollar in such period versus foreign currencies in      
which the Company had unhedged positions.                                       

EBITDA. EBITDA decreased from 4.3 million in the nine months ended September
30, 1996, to 0.6 million in the nine months ended September 30, 1997.           

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

Revenues. Revenues increased 65.1%, or $84.1 million, from $129.1 million in
1995 to $213.2 million in 1996. The increase in revenues was due primarily to   
an increase in billed customer minutes from the domestic and international      
call-reorigination distribution channels and the first full year of wholesale   
carrier operations. Revenues from international and domestic retail call        
service usage increased by 39.8%, or $51.0 million, from $128.1 million in      
1995 to $179.1 million in 1996. Revenues from wholesale carrier service usage   
increased by $33.1 million, from $1.0 million in 1995 to $34.1 million in       
1996. The wholesale revenue growth is largely the result of a significant       
increase in traffic utilization from one international carrier, using bulk      
call-reorigination to service its market more competitively.                    

Cost of Revenues. Cost of revenues increased 81.1%, or $67.4 million, from  
$83.1 million in 1995, to $150.5 million in 1996. The increase in cost of       
revenues was attributable primarily to increased traffic being handled by the   
Company and increased costs associated with the expansion of the TIGN. The      
increase in cost of revenues as a percent of revenues was attributable          
primarily to the greater increase in the wholesale business as a percentage of  
revenues. Other factors contributing to the increase in cost of revenues as a   
percent of revenues included volume discounts to one large wholesale customer   
in the fourth quarter of 1996, traffic rerouting penalties associated with      
certain wholesale carrier traffic that exceeded the capacity of the Company's   
network                                                                         

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in the first two months of the fourth quarter; certain rate reductions to       
customers in the U.S., Japan and France ahead of corresponding carrier cost     
declines and the addition of fixed access costs associated with the expansion   
of the TIGN.                                                                    

The cost of revenues as a percentage of total revenues increased from 64.4% 
in 1995 to 70.6% in 1996. Of the contributing factors identified above,         
increases in wholesale business accounted for 3.0%, volume discounts being      
offered accounted for 1.0% and rate reductions to customers in advance of       
corresponding rate decreases from carriers and other factors accounted for the  
additional 2.2% of the difference.                                              

Gross Profit. Gross profit increased 36.3%, or $16.7 million, from $46.0    
million in 1995 to $62.7 million in 1996. As a percentage of revenues, gross    
profit decreased from 35.6% in 1995 to 29.4% in 1996.                           

Operating Expenses. Operating expenses increased 56.9%, or $22.7 million,   
from $39.9 million in 1995 to $62.6 million in 1996. This increase was          
primarily due to greater employee and contract employee costs, professional     
fees for network and operating systems developers and legal, financial and      
accounting costs associated with the development of the TIGN and the            
supporting information and financial systems. From 1995 to 1996, the Company's  
staff levels grew from 296 full and part time positions to 444 full and part    
time positions, representing a 50.0% increase in the number of employees.       
Growth was mainly in the professional category, with the hiring of additional   
telecommunications technicians and programmers, and finance and accounting      
professionals.                                                                  

Bad debt expense increased $1.1 million, from $4.0 million in 1995, to $5.1 
million in 1996. As a percentage of revenues, bad debt expense decreased from   
3.1% in 1995 to 2.4% in 1996, primarily as a result of improvements in the      
Company's collections systems and procedures.                                   

Depreciation and amortization increased $1.2 million, from $0.7 million in  
1995, to $1.9 million in 1996. The increase in depreciation and amortization    
is primarily attributable to increased capital expenditures incurred in         
connection with the development and expansion of the TIGN and amortization of   
goodwill associated with: (i) the acquisition of the operations of the          
Company's Country Coordinator in France in August 1996; and (ii) expenses       
incurred by the Company in connection with the private placement of its Senior  
Subordinated Notes in November 1996.                                            

The Company also incurred a non-cash stock option based compensation expense
of $1.0 million in the fourth quarter of 1996, resulting from the grant of      
non-qualified and performance base stock options to certain employees.          

As a percentage of revenues, operating expenses decreased from 30.9% in 1995
to 29.3% in 1996, as the additional costs and expenses were more than offset    
by increased revenues during the period.                                        

Operating Income. Operating income decreased by $6.0 million, from $6.1     
million in 1995 to $0.1 million in 1996. As a percentage of revenues,           
operating income decreased from 4.7% in 1995 to 0.1% in 1996, for the reasons   
discussed above.                                                                

Interest Expense. Interest expense increased from $0.1 million for 1995 to  
$0.6 million for 1996, an increase of $0.5 million. The increase is directly    
attributable to the increase in long-term indebtedness during 1996.             

Net Earnings (Loss). Net earnings decreased $3.9 million from $3.8 million  
in 1995 to $(0.1) million in 1996.                                              

EBITDA. EBITDA decreased from $7.0 million in 1995, to $3.0 million in 1996.

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YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994           

Revenues. Revenues increased 87.9%, or $60.4 million, from $68.7 million in 
1994 to $129.1 million in 1995. This increase was due primarily to an increase  
in billed customer minutes of use from call-reorigination customers in Western  
Europe, especially in France and the Netherlands.                               

Cost of Revenues. Cost of revenues increased 67.9%, or $33.6 million, from  
approximately $49.5 million in 1994 to approximately $83.1 million in 1995. As  
a percentage of revenues, cost of revenues declined from 72.0% to 64.4%,        
primarily as a result of volume discounts under fixed-price lease agreements    
and a reduction in rates charged by the Company's carrier suppliers.            

Gross Profits. Gross profit increased 139.6%, or $26.8 million, from $19.2  
million in 1994 to $46.0 million in 1995. As a percentage of revenues, gross    
profit increased from 28.0% in 1994 to 35.6% in 1995, due to the decline in     
the relative cost of revenues as a percentage of overall revenues.              

Operating Expenses. Operating expenses increased 97.5%, or $19.7 million,   
from $20.2 million in 1994 to $39.9 million in 1995, primarily as a result of   
increases in commissions to independent agents and Country Coordinators         
directly relating to the Company's increased revenues and to growth in sales,   
customer service, billing, collections and accounting staff required to         
support this growth. As a percentage of revenues, operating expenses increased  
1.4% from 29.5% in 1994 to 30.9% in 1995, primarily due to the growth in staff  
needed to accommodate the Company's growth in business volume and complexity.   
Staff levels grew from 217 full and part time employees in 1994 to 296 in       
1995, representing a 36.4% increase in the staff compliment.                    

Bad debt expense increased from $1.1 million, or 1.5% of revenues in 1994,  
to $4.0 million, or 3.1% of revenues, in 1995, due to a rapid increase in       
international sales, which outpaced the Company's collection abilities.         

Depreciation and amortization increased from $0.3 million in 1994, to $0.7  
million in 1995, primarily due to increased capital expenditures incurred in    
connection with the development and expansion of the Company's network.         

Operating Income. Operating income increased by $7.1 million, from $(1.0)   
million in 1994 to $6.1 million in 1995, as a result of increased sales and     
gross profit with commensurate costs and expenses.                              

Net Earnings (Loss). Net earnings increased $4.3 million from $(0.5) million
in 1994 to $3.8 million in 1995, as a result of improved operating income.      

EBITDA. EBITDA increased from $(0.6) million in 1994, to $7.0 million in    
1995.                                                                           

LIQUIDITY AND CAPITAL RESOURCES                                                 

The Company's capital investments consist of capital expenditures in        
connection with the acquisition and maintenance of switching capacity and       
funding of accounts receivable and other working capital requirements.          
Historically, the Company's capital requirements have been funded primarily by  
funds provided by operations, term loans and revolving credit facilities from   
commercial banks, and by capital leases. The Company expects to require         
substantial additional capital to develop and expand the TIGN, open new         
offices, introduce new telecommunications services, upgrade and/or replace its  
management information systems, and fund its anticipated operating losses and   
net cash outflows in the near term.                                             

Net cash provided by (used in) operating activities was $4.1 million in the 
nine months ended September 30, 1996 and $(1.0) million in the nine months      
ended September 30, 1997. The net cash provided by operating activities in the  
nine months ended September 30, 1996 was primarily due to net earnings and an   
increase in the provision for credit losses on accounts receivable. The net     
cash used in operating activities in the nine months ended September 30, 1997   
was primarily due to the net loss, an increase in depreciation and              
amortization                                                                    

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expense, an increase in provision for credit losses on accounts receivable,     
and an increase in accounts payable. These increases were partially offset by   
an increase in accounts receivable. The $1.7 million increase in deposits and   
other assets in the nine months ended September 30, 1997 was due primarily to   
an increase in goodwill arising from business combinations net of               
amortization.                                                                   

Net cash provided by operating activities was $1.4 million in 1994, $5.6    
million in 1995 and $4.9 million in 1996. The net cash provided by operating    
activities in 1996 and 1995 was mainly a result of a greater increase in        
accounts payable to carriers relative to the increase in accounts receivable    
from customers. In 1995, net cash provided by operating activities was mainly   
due to net earnings, changes in operating activities and off-setting increases  
in current assets and liabilities for the year.                                 

Net cash used in investing activities was $(8.3) million in the nine months 
ended September 30, 1996 and $(13.3) million in the nine months ended           
September 30, 1997. The net cash used in the nine months ended September 30,    
1996 and September 30, 1997, was primarily due to increases in equipment        
purchases.                                                                      

Net cash used in investing activities was $0.7 million in 1994, $2.8 million
in 1995 and $11.3 million in 1996. The net cash used in investing activities    
in 1996, 1995 and 1994 was mainly due to an increase in equipment purchases,    
and in 1996, the expenditure of $1.8 million in capitalized software            
development costs.                                                              

Net cash provided by financing activities was $3.9 million in the nine      
months ended September 30, 1996, and $58.6 million in the nine months ended     
September 30, 1997. The net cash provided in the nine months ended September    
30, 1996 was primarily due to proceeds from long-term borrowings and the        
operating line of credit. The net cash provided in the nine months ended        
September 30, 1997 was primarily due to proceeds from the IPO and long-term     
borrowings.                                                                     

Net cash provided by (used in) financing activities was $1.0 million in     
1994, $(0.1 million) in 1995 and $15.9 million in 1996. In November 1996, the   
Company completed a private placement of its Senior Subordinated Notes for net  
proceeds of $18.5 million.                                                      

On July 14, 1997, the Company completed the IPO yielding net proceeds of    
approximately $35.6 million after deducting expenses and underwriting           
discounts. In addition, on August 12, 1997, the Company completed the sale of   
an additional 450,000 shares of Common Stock pursuant to the exercise of the    
underwriters' over allotment option, yielding net proceeds to the Company of    
approximately $4.2 million after deducting underwriting discounts.              

In September, 1997, the Company entered into its $15 million Revolving      
Credit Facility. On September 5, 1997, the Company prepaid in full all of its   
outstanding $20 million in aggregate principal amount of the Senior             
Subordinated Notes at a redemption price equal to 107% of the principal amount  
thereof, plus accrued interest. The Company financed the prepayment of the      
Senior Subordinated Notes with a portion of the net proceeds from the IPO and   
$8.5 million of borrowings under the Revolving Credit Facility. The Revolving   
Credit Facility expired on October 31, 1997. The Company currently anticipates  
entering into the New Credit Facility with a bank or other financial            
institution for available borrowings in an amount not expected to exceed $20    
million. There can be no assurance that the Company will enter into the New     
Credit Facility.                                                                

On September 30, 1997, the Company issued $25 million aggregate principal   
amount of Convertible Notes. The net proceeds from the issuance of the          
Convertible Notes were approximately $24.3 million and approximately $15.0      
million of such net proceeds were used to repay all amounts outstanding under   
the Revolving Credit Facility.                                                  

On October 23, 1997, the Company sold $97.0 million aggregate principal     
amount at maturity of its Senior Discount Notes, with net proceeds of           
approximately $72.3 million. The Senior Discount Notes will accrete in value    
from the date of issuance to May 1, 2000, at a rate of 10 1/2% per annum,       
compounded semi-annually.                                                       

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Cash interest on the Senior Discount Notes will neither accrue nor be payable   
prior to May 1, 2000. Commencing May 1, 2000, interest will be payable in cash  
on the Senior Discount Notes semi-annually in arrears on each May 1, and        
November 1, at a rate of 10 1/2% per annum. The Senior Discount Notes will      
mature on November 1, 2004.                                                     

The development and expansion of the TIGN, the upgrade and/or replacement of
the Company's management information systems, the opening of new offices and    
the introduction of new telecommunications services, as well as the funding of  
anticipated losses and net cash outflows, will require substantial additional   
capital. At September 30, 1997, the Company had $4.5 million in commitments     
for capital expenditures. The Company has identified an additional $60.1        
million of capital expenditures which the Company intends to undertake in 1997  
and 1998 and approximately $75.0 million of additional capital expenditures     
during the period from 1999 through 2001, subject to the ability to obtain      
additional financing.                                                           

The Company expects that the net proceeds from the IPO, the Convertible     
Notes and the Senior Discount Notes will provide the Company with sufficient    
capital to fund planned capital expenditures and anticipated operating losses   
through December 1998. The net proceeds from the IPO, the Convertible Notes     
and the Senior Discount Notes are expected to provide sufficient funds for the  
Company to expand its business as planned and to fund anticipated operating     
losses and net cash outflows for the next 18 to 24 months. There can be no      
assurance that the Company will be able to obtain the New Credit Facility or    
if obtained, that it will be able to do so on a timely basis or on terms        
favorable to the Company. The amount of the Company's actual future capital     
requirements will depend upon many factors, including the performance of the    
Company's business, the rate and manner in which it expands the TIGN,           
increases staffing levels and customer growth, upgrades or replaces management  
information systems and opens new offices, as well as other 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 change or prove to be inaccurate, the Company does not enter     
into the New Credit Facility, or the net proceeds of the Offering, together     
with internally generated funds and funds from other financings, including the  
Revolving Credit Facility or the New Credit Facility, if entered into, 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 funds earlier      
than currently anticipated.                                                     

The Company continuously reviews opportunities to further its strategy      
through strategic alliances with, investments in, or acquisitions of companies  
that are complementary to the Company's operations. The Company may finance     
such a venture with cash flow from operations or through additional bank debt   
or one or more public offerings or private placements of securities.            

FOREIGN CURRENCY                                                                

Although the Company's functional currency is the U.S. Dollar, the Company  
derives a substantial percentage of its telecommunications revenues from        
international sales. In countries where the local currency is freely            
exchangeable and the Company is able to hedge its exposure, the Company bills   
for its services in the local currency. In cases where the Company bills in a   
local currency, the Company is exposed to the risk that the local currency      
will depreciate between the date of billing and the date payment is received.   
In certain countries in Europe, the Company purchases foreign exchange          
contracts through its fiscal agent to hedge against this foreign exchange       
risk. For the twelve months ended December 31, 1996, approximately $54.0        
million (U.S. Dollar equivalent) or 25.3% of the Company's billings for         
telecommunications services were billed in non-U.S. Dollar local currencies.    
For the nine months ended September 30, 1997, approximately $56.3 million       
(U.S. Dollar equivalent) or 23.6% of the Company's billings for                 
telecommunications services were billed in non-U.S. Dollar local currencies.    

The Company's financial position and results of operations for the year     
ended December 31, 1996 and the nine months ended September 30, 1997 were not   
significantly affected by foreign currency exchange rate fluctuation. As the    
Company continues to expand the TIGN and increase its customer base in its      
targeted markets, an increasing proportion of costs associated with operating   
and maintaining the TIGN, as well as local selling                              

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expenses, will be billed in foreign currencies. Although the Company and its    
Subsidiaries attempt to match costs and revenues and borrowings and repayments  
in terms of local currencies, there will be many instances in which costs and   
revenues and borrowings and repayments will not be matched with respect to      
currency denominations. The Company may choose to limit any additional          
exposure to foreign exchange rate fluctuations by the purchase of foreign       
forward exchange contracts or similar hedging strategies. There can be no       
assurance that any currency hedging strategy would be successful in avoiding    
exchange-related losses. See "Risk Factors--Foreign Exchange Rate Risks;        
Repatriation Risks."                                                            

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS                                       

In February 1997, the Financial Accounting Standards Board issued Statement 
No. 128, "Earnings Per Share" which revises the calculation and presentation    
provisions of Accounting Principles Board Opinion 15 and related                
interpretations. Statement No. 128 is effective for the Company's fiscal year   
ending December 31, 1997. Retroactive application will be required.             

SFAS 130, "Reporting Comprehensive Income," was issued in June 1997. It     
establishes standards for reporting and display of comprehensive income and     
its components in a full set of general-purpose financial statements.           

SFAS 131, "Disclosures about Segments of an Enterprise and Related          
Information," was issued in June 1997. It establishes standards for the way     
that public business enterprises report information about operating segments    
in annual financial statements and requires that those enterprises report       
selected information about operating segments in interim financial reports      
issued to shareholders. It also establishes standards for related disclosures   
about products and services, geographic areas, and major customers.             

The Company does not believe that adoption of any of these standards will   
have a significant effect on its reported earnings per share or consolidated    
financial statements.                                                           

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.               

SEASONAL FLUCTUATIONS                                                           

The Company has historically experienced, and expects to continue to        
experience, reduced growth rates in revenues in the months of August and        
December due to extended vacation time typically taken by Americans and         
Europeans during these months.                                                  

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THE GLOBAL TELECOMMUNICATIONS INDUSTRY  

OVERVIEW                                                                        

According to the World Telecommunication Development Report 1996/97         
published by the ITU on February 20, 1997 (the "ITU Report"), the 1998 revenue  
of the global telecommunications industry is projected to exceed $1 trillion.   
In terms of market capitalization, the industry already ranks third behind      
banking and health care. The industry can be divided into two sectors,          
equipment, which accounts for almost one-fourth of the revenue, and services,   
which accounts for the remainder. These two sectors can be further divided      
into the national and international segments. The national telecommunication    
services provide voice and data transmission within the borders of a nation,    
whereas, the international telecommunication services provide voice and data    
transmission across national borders from one national telephone network to     
another. The entire industry has experienced dramatic changes during the past   
decade as a result of significant growth in the use of services and             
enhancements to technology. The industry is expecting similar growth in         
revenue and traffic volume in the foreseeable future. In 1995, cross-border     
telecommunication services accounted for $52.8 billion in revenues and 60.3     
billion minutes of use, increasing from $21.7 billion in revenues and 16.7      
billion minutes of use in 1986. This represents compound annual growth rates    
of 10% and 15%, respectively. The ITU estimates that the 1996 sales exceeded    
$100 billion for total cross-border telecommunications services. The ITU        
Report estimates sales of equipment and services in the global                  
telecommunications industry will exceed $1 trillion in 1998, three-quarters of  
which will be from services. The ITU projects that revenues from global         
telecommunications services will exceed $900 billion in the year 2000.          

The market for telecommunications services is highly concentrated. In 1995, 
40 countries accounted for 83.8% of the global revenue, with the EU, Japan,     
and the United States accounting for almost 75% of global revenue. The          
Company's top ten targeted markets accounted for over 78% of all                
telecommunication services revenue in 1995. Each market contributed as          
follows: U.S. (30.3%), Japan (15.9%), Italy (9.5%), Germany (8.1%), the United  
Kingdom (4.7%), France (4.6%), Switzerland (1.5%), Australia/New Zealand        
(2.3%), the Netherlands (1.4%), and Hong Kong (0.9%).                           

Growth and change in the international telecommunications industry have been
fueled by a number of factors, including greater consumer demand,               
globalization of the industry, increases in international business travel,      
privatization of ITOs, and growth of computerized transmission of voice and     
data information. These trends have sharply increased the use of, and reliance  
upon, telecommunications services throughout the world. The Company believes    
that despite these trends, a high percentage of the world's businesses and      
residential consumers continue to be subject to high prices with poor quality   
of service which have been characteristic of many ITOs. Demand for improved     
service and lower prices has created opportunities for private industry to      
compete in the international telecommunications market. Increased competition,  
in turn, has spurred a broadening of products and services, and new             
technologies have contributed to improved quality and increased transmission    
capacity and speed.                                                             

Consumer demand and competitive initiatives have also acted as catalysts for
government deregulation, especially in developed countries. Deregulation        
accelerated in the United States in 1984 with the divestiture by AT&T of the    
RBOCs. Today, there are over 500 U.S. long distance companies, most of which    
are small or medium-sized companies. In order to be successful, these small     
and medium-sized companies have to offer their customers a full range of        
services, including international long distance. However, most of these         
carriers do not have the critical mass of customers to receive volume           
discounts on international traffic from the larger facilities-based carriers    
such as AT&T, MCI and Sprint. In addition, these small and medium-sized         
companies have only a limited ability to invest in international facilities.    
Alternative international carriers such as the Company have capitalized on      
this demand for less expensive international transmission facilities. These     
emerging international carriers are able to take advantage of larger traffic    
volumes to obtain volume discounts on international routes (resale traffic)     
and/or invest in facilities when volume on particular routes justify such       
investments. As these emerging international carriers have become established,  
they have also begun to carry overflow traffic from the larger long distance    
providers that own overseas transmission facilities.                            

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Deregulation in the United Kingdom began in 1981 when Mercury, a subsidiary 
of Cable & Wireless plc, was granted a license to operate a facilities-based    
network and compete with BT. Deregulation and privatization have also allowed   
new long distance providers to emerge in other foreign markets. Deregulation    
spread to Europe with the adoption of the "Directive on Competition in the      
Markets for Telecommunication Services" in 1990. A series of subsequent EU      
Directives, reports and actions are expected to result in substantial           
deregulation of the telecommunications industries in most EU member states by   
1998. A similar movement toward deregulation has already taken place in         
Australia and New Zealand and is taking place in Japan, Mexico, Hong Kong and   
other markets. Other governments have begun to allow competition for value-     
added and other selected telecommunications services and features, including    
data and facsimile services and certain restricted voice services. Many         
governments also permit or tolerate the provision of international call-        
reorigination services to customers in their territories. In many countries,    
however, the rate of change and emergence of competition remain slow and the    
timing and extent of future deregulation is uncertain.                          

On February 15, 1997, pursuant to the WTO Agreement, the United States and  
more than 60 members of the WTO agreed to open their respective                 
telecommunications markets to competition and foreign ownership and adopted     
regulatory measures to protect market entrants against anticompetitive          
behavior by dominant telephone companies. Although the Company believes that    
the WTO Agreement could provide the Company with significant opportunities to   
compete in markets that were not previously accessible, reduce its costs and    
provide more reliable services, the WTO Agreement could also provide similar    
opportunities to the Company's competitors. In some countries, for example,     
the Company will be allowed to own facilities or to interconnect to the public  
switched network on reasonable and non-discriminatory terms. There can be no    
assurance, however, that the pro-competitive effects of the WTO Agreement will  
not have a material adverse effect on the Company's business, financial         
condition and results of operations or that members of the WTO will implement   
the terms of the WTO Agreement.                                                 

By eroding the traditional monopolies held by ITOs, many of which are or    
were wholly or partially government owned, deregulation is providing U.S.-      
based providers the opportunity to negotiate more favorable agreements with     
both the traditional ITOs and emerging foreign providers. In addition,          
deregulation in certain foreign countries is enabling U.S.-based providers to   
establish local switching and transmission facilities in order to terminate     
their own traffic and begin to carry international long distance traffic        
originated in those countries.                                                  

INTERNATIONAL SWITCHED LONG DISTANCE SERVICES                                   

International switched long distance services are provided through switching
and transmission facilities that automatically route calls to circuits based    
upon a predetermined set of routing criteria. In the U.S., an international     
long distance call typically originates on a LEC's network and is switched to   
the caller's domestic long distance carrier. The domestic long distance         
provider then carries the call to its own or another carrier's international    
gateway switch. From there it is carried to a corresponding gateway switch      
operated in the country of destination by the ITO of that country and then is   
routed to the party being called though that country's domestic telephone       
network.                                                                        

International long distance providers can generally be categorized by the   
extent, if any, of their ownership and use of their own switches and            
transmission facilities. The largest U.S. carriers, AT&T, MCI, Sprint, and      
WorldCom primarily utilize owned U.S. transmission facilities and generally     
use other long distance providers to carry their overflow traffic. Only the     
largest U.S. carriers have operating agreements with, and own transmission      
facilities that carry traffic to, 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 either rely      
solely on resale agreements with other long distance carriers to terminate      
their traffic or use a combination of resale agreements and leased or owned     
facilities in order to terminate their traffic, as discussed below.             

Switched Resale Arrangements. A switched resale arrangement typically       
involves the wholesale purchase of termination services by one long distance    
provider from another on a variable, per minute basis. Such resale,             

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which was first permitted with the deregulation of the U.S. market, enables     
the emergence of alternative international providers that rely at least in      
part on transmission services acquired on a wholesale basis from other long     
distance providers. A single international call may pass through the            
facilities of multiple long distance 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 time period or subject to fluctuation following notice.    
The resale market for international transmission is constantly changing, as     
new long distance resellers emerge and existing providers respond to            
fluctuating costs and competitive pressures. In order to effectively manage     
costs when utilizing resale arrangements, long distance providers need timely   
access to changing market data and must quickly react to changes in costs       
through pricing adjustments or routing decisions. The Company has entered into  
resale agreements with more than 20 carriers in the U.S., U.K., Canada, the     
Netherlands, Denmark, Australia, Hong Kong and Switzerland, four of which       
accounted for approximately 60% of the Company's cost of revenues for the year  
ended December 31, 1996 and 61% for the nine months ended September 30, 1997.   

Transit Arrangements. In addition to utilizing an operating agreement to    
terminate traffic delivered from one country directly to another, an            
international long distance provider may enter into transit arrangements        
pursuant to which a long distance provider in an intermediate country carries   
the traffic to the country of destination.                                      

Alternative Transit/Termination Arrangements. As the international long     
distance market began to deregulate, long distance providers developed          
alternative transit/termination arrangements in an effort to decrease their     
costs of terminating international traffic. Some of the more significant of     
these arrangements include refiling, ISR and ownership of switching facilities  
in foreign countries. Refiling of traffic, which takes advantage of             
disparities in settlement rates between different countries, allows traffic to  
a destination country to be treated as if it originated in another country      
that enjoys lower settlement rates with the destination country, thereby        
resulting in a lower overall termination cost. The difference between transit   
and refiling is that, with respect to transit, the long distance provider in    
the destination country has a direct relationship with the originating long     
distance provider and is aware of the arrangement, while with refiling, it is   
likely that the long distance provider in the destination country is not aware  
of the country in which the traffic originated or of the originating carrier.   
To date, the FCC has made no pronouncement as to whether refiling complies      
with either U.S. or ITU regulations, although it is considering such issues in  
an existing proceeding. While the Company's revenues attributable to refiling   
arrangements are minimal, refiling may constitute a larger portion of the       
Company's operations in the future.                                             

With ISR, a long distance provider completely bypasses the accounting rates 
system by connecting an international leased private line (i) to the PSTN of    
two countries or (ii) directly to the premises of a customer or partner in one  
country and the PSTN in the other country (except in the U.K., where only the   
activity described in (i) is considered to be "ISR"). While ISR currently is    
only sanctioned by applicable regulatory authorities on a limited number of     
routes, including U.S.-U.K., U.S.-Canada, U.S.-Sweden, U.S.-New Zealand, U.K.-  
worldwide and Canada-U.K., it is increasing in use and is expected to expand    
significantly as deregulation of the international telecommunications market    
continues and makes it possible for long distance providers to establish their  
own switching facilities in certain foreign countries, enabling them to         
directly terminate traffic. See "Business--Government Regulation." The Company  
has been granted a license by the FCC to engage in ISR in the U.S. The Company  
anticipates that the FCC will soon approve ISR with Denmark, the Netherlands,   
Norway, France, Germany, and Finland with Japan and Hong Kong possibly to       
follow in the near future. The Company is either using or prepared to use       
direct leased capacity among countries where such use is either authorized or   
about to be authorized. In the U.K., ISR is permitted with any country,         
provided the U.K. based carrier has been granted the appropriate license. The   
Company's wholly owned U.K. Subsidiary, Telegroup UK Limited, has been granted  
its U.K. ISR license.                                                           

Operating Agreements. Under traditional operating agreements, international 
long distance traffic is exchanged under bilateral agreements between           
international long distance providers that have rights in facilities            

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in different countries. Operating agreements provide for the termination of     
traffic in, and return traffic from, the international long distance            
providers' respective countries at a negotiated "accounting rate." Under a      
traditional operating agreement, the international long distance provider that  
originates more traffic compensates the long distance provider in the other     
country by paying an amount determined by multiplying the net traffic           
imbalance by the latter's share of the accounting rate.                         

The Company currently has an operating agreement with AT&T Canada (formerly 
Unitel), Canada's second largest carrier. This agreement is used primarily to   
transit/terminate traffic between the U.S. and Canada. Also, the Company has    
purchased capacity on the CANTAT-3 cable system as a means of linking its       
switching facilities in the U.S. and the U.K. In addition, the Company both     
leases transmission facilities and resells switched minutes from carriers that  
have operating agreements. By aggressively negotiating resale agreements with   
carriers who have entered into operating agreements, the Company takes          
advantage of such carrier's economic incentive to increase outgoing traffic to  
a particular country. The resold call volume increases the market share for     
that carrier to a particular country, thereby increasing such carrier's         
proportionate return traffic from the correspondent under the accounting rate   
process. The Company may in the future enter into additional operating          
agreements if such agreements would improve the Company's profitability over    
these routes.                                                                   

Under a typical operating agreement each carrier has a right in its portion 
of the transmission facilities between two countries. A carrier gains           
ownership rights in a digital fiber-optic cable by purchasing direct ownership  
in a particular cable (usually prior to the time the cable is placed in         
service), by acquiring an "Indefeasible Right of Use" ("IRU") in a previously   
installed cable, or by leasing or obtaining capacity from another long          
distance provider that either has direct ownership or IRU rights in the cable.  
In situations where a long distance provider has sufficiently high traffic      
volume, routing calls across leased, IRU, or directly-owned cable capacity is   
generally more cost-effective on a per call basis than the use of resale        
arrangements with other long distance providers. However, leased capacity,      
acquisition of IRU rights, and direct ownership require a company to make a     
substantial initial investment of its capital based on the amount of capacity   
being acquired. Telegroup's interest in the CANTAT-3 Trans-Atlantic cable       
between New York and the U.K. is 50% IRU and 50% leased. The Company intends    
to acquire 100% IRU ownership.                                                  

The rapidly changing international telecommunications market has created a  
significant opportunity for carriers that can offer high quality, low cost      
international long distance service. Deregulation, privatization, the           
expansion of the resale market and other trends influencing the international   
telecommunications market are resulting in decreased termination costs, a       
proliferation of routing options, and increased competition. To be successful,  
both the alternative and established international long distance companies      
will need to aggregate enough traffic to maximize the use of both facilities-   
based and resale opportunities, maintain systems which enable analysis of       
multiple routing options, invest in facilities and switches and remain          
flexible enough to locate and route traffic through the most advantageous       
routes.                                                                         

COMPETITIVE OPPORTUNITIES AND ADVANCES IN TECHNOLOGY                            

The combination of a continually expanding global telecommunications market,
consumer demand for lower prices with improved quality and service, and         
ongoing deregulation has created competitive opportunities in many countries.   
Further, as more small and medium-sized businesses and residential customers    
have come to rely on international telecommunications services for their        
business and personal needs, an increasingly diverse and sophisticated          
customer base has generated demand for a greater variety of services.           
Increased competition has also resulted in improved quality of service at       
lower prices. Similarly, new technologies, including fiber-optic cable and      
improvements in digital compression, have improved quality and increased        
transmission capacities and speed, with transmission costs decreasing as a      
result.                                                                         

Advances in technology have created multiple ways for telecommunications    
carriers to provide customer access to their networks and services. These       
include customer-paid local access, international and national toll-free        
access, direct digital access through a dedicated line, equal access through    
automated routing from the PSTN and call-reorigination. The type of access      
offered depends on the proximity of switching facilities to the customer, the   
needs of the customer, and the regulatory environment in which the carrier      
competes. Overall,                                                              

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these changes have resulted in a trend towards bypassing traditional            
international long distance operating agreements as international long          
distance companies seek to operate more efficiently.                            

In a deregulated country such as the United States, carriers can establish  
switching facilities, own or lease fiber-optic cable, enter into operating      
agreements with foreign carriers and, accordingly, provide direct access        
service. In markets that have not deregulated or are slow in implementing       
deregulation, such as South Africa, international long distance carriers have   
used advances in technology to develop innovative alternative access methods,   
such as call-reorigination. In other countries, such as Japan and most EU       
member states, where deregulation is imminent but not complete, carriers are    
permitted to offer facilities-based data and facsimile services, as well as     
limited voice services including those to CUGs, but are as yet precluded from   
offering full voice telephony. As countries deregulate, the demand for          
alternative access methods typically decreases as carriers are permitted to     
offer a wider range of facilities-based services on a transparent basis.        

The most common form of alternative international access, traditional call- 
reorigination, avoids the high international rates offered by the ITO in a      
particular regulated country by providing customers with dial tone from a       
deregulated country, typically the United States. To place a call using         
traditional call-reorigination, a user dials a unique phone number to an        
international carrier's switching center and then hangs up after it rings. The  
user then receives an automated callback providing dial tone from the U.S.      
which enables the user to complete the call. Technical innovations, ranging     
from inexpensive dialers to sophisticated in-country switching platforms, have  
enabled telecommunications carriers to offer a "transparent" form of call-      
reorigination. The customer dials into the local switch, and then dials the     
international number in the usual fashion, without experiencing the "hang-up"   
and "callback," and the international call is automatically and swiftly         
processed.                                                                      

Historically, a significant portion of the Company's revenue and operating  
income has been derived from the provision of traditional international call-   
reorigination services to retail customers on a global basis. The Company       
believes that as deregulation occurs and competition increases in various       
markets around the world, the pricing advantage of traditional call-            
reorigination to most destinations relative to conventional call-through        
international long distance service will diminish in those markets. The         
Company believes that, in order to maintain its existing customer base and to   
attract new customers in such markets, it will need to be able to offer call-   
through services at prices significantly below the current prices charged for   
call-reorigination. See "Risk Factors--Expansion and Operation of the TIGN."    

The worldwide telecommunications market is increasingly served by a wide    
range of telecommunications providers, many of which seek to focus on only a    
limited segment of the overall market. ITOs and major global carriers           
typically concentrate their efforts on multinational companies and other high   
volume long distance telephone users that demand high quality and customized    
services. Many alternative carriers, such as the Company, concentrate on        
serving the international long distance needs of small and medium-sized         
business and high-volume residential customers who in the aggregate have        
significant international long distance traffic.                                

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The following table provides an overview of the Company's core international
telecommunications markets:                                                     

                                                        [Enlarge/Download Table]

                                       1995 ORIGINATED                                               
                                          MINUTES OF                                                 
                                        INT'L TRAFFIC                                                
COUNTRY                  TOTAL MINUTES (IN BILLIONS)(1) DEREGULATION DATE           ITO(S)           
-------                  ------------- ---------------- -----------------           ------           
                                                                                                     
United States...........                     15.6            1984(2)      AT&T, MCI, Sprint, WorldCom
Germany.................                      5.2          1/1/1998(3)    Deutsche Telecom           
United Kingdom..........                      4.0            1981(4)      BT, Mercury                
France..................                      2.8          1/1/1998(3)    France Telecom             
Switzerland.............                      1.8          1/1/1998(3)    Swisscom                   
Hong Kong...............                      1.7            1995(6)      HKTI                       
Japan...................                      1.6             1998        KDD, IDC, ITJ              
Netherlands.............                      1.5           7/1/1997      KPN                        
Australia...............                      1.0            1991(7)      Telstra, OPTUS             
Sweden..................                      0.9            1980(5)      Telia AB, Tele-2           

--------                                                                        
(1) Source: TeleGeography 1996/97.                                              
(2) Deregulation accelerated in the United States in 1984 with the divestiture  
by AT&T of the RBOCs.                                                   
(3) Date set for complete liberalization of the telecommunications market       
established by the EU Full Competition Directive.                       
(4) The deregulation of the United Kingdom telecommunications market began in   
1981, when a second national carrier, Mercury, was first licensed.      
(5) Although Sweden is subject to the EU deadline for complete liberalization,  
it began permitting competition in 1980.                                
(6) To date, Hong Kong has not officially deregulated its telecommunications    
market. However, in 1995, the Hong Kong regulator granted local FTNS    
licenses to three carriers, and has since permitted the provision of    
value-added, data and, virtual private network services. China assumed  
sovereignty of Hong Kong on July 1, 1997. See "Risk Factors--Substantial
Government Regulation--The Pacific Rim."                                
(7) Liberalization began in Australia in 1991, when a second facilities-based   
carrier, OPTUS, was authorized to begin operation. Under Australian law,
competitors to the ITO may own international facilities.                

United States. The U.S. long distance market, with 1995 revenue of          
approximately $70.0 billion, is the largest and most competitive in the world.  
The international segment of this market was 15.6 billion minutes of usage in   
1995. According to TeleGeography, a leading industry publication, five of the   
top six international calling routes originate or terminate in the U.S. The     
U.S. domestic long distance market is largely dominated by the four major       
carriers: AT&T (54.3%), MCI (28.5%), Sprint (11.3%), and WorldCom (3.5%),       
which collectively control approximately 97% of the market. MCI and WorldCom    
have recently announced plans to merge. Several second and third tier           
carriers, such as Frontier, LCI, Excel Communications, Inc., Tel-Save           
Holdings, Inc. and Telco Communications Group, Inc., have made inroads in both  
the high-volume residential and small and medium-sized business sectors. The    
second and third tier providers have largely employed a strategy of switched    
resale targeted at the national long distance market. The international long    
distance market for small and medium-sized businesses, which is the Company's   
primary focus, has been largely ignored by the major carriers as well as the    
second and third tier national long distance providers.                         

The Company believes that the U.S. long distance market will become more    
competitive in the near future as the 1996 Telecommunications Act permits RBOC  
entry into long distance. The Company believes that the RBOCs will focus their  
marketing efforts on the high-end of the long distance market, where they will  
be able to offer the greatest savings on local access charges to large          
business customers, and on the low-end of the market, where they will be able   
to provide small residential users with the convenience of a single bill.       

Netherlands. The market for international telecommunications in the         
Netherlands has historically been dominated by the Dutch ITO, KPN. The Dutch    
market was completely liberalized on July 1, 1997. The Company believes it is   
the largest provider of international telecommunications services in this       
market. Two alternative                                                         

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carriers, Telfort and Enertel, are currently building out networks and          
starting to provide competitive national and international services. The        
Company believes that new entrants will drive down transmission costs and       
potentially open up opportunities in the national long distance and wholesale   
sectors of the market.                                                          

France. The market for international telecommunications in France has       
historically been dominated by the French ITO, France Telecom. The Company      
believes it is the largest provider of international telecommunications         
services in this market. Telecom Development, a consortium led by SNCF, the     
French National Railways Company, and Compagnie Generale des Eaux, the leading  
French telecommunications group, has commenced construction of a facilities-    
based, digital long distance network to offer a broad range of voice and data   
services. In addition, other competitors have entered the market, including     
WorldCom which has begun a build-out of local fiber loops in the Paris region   
and Unisource which has installed switches connected by leased lines            
throughout France.                                                              

United Kingdom. The deregulation of the U.K. telecommunications industry    
began in 1981 when Mercury, a subsidiary of Cable & Wireless plc, was granted   
a license to operate a facilities-based network and compete with BT. This       
duopoly over all public voice telecommunication services continued until 1991   
when the government further liberated the U.K. national telecommunications      
market by stating it would license new national and regional public             
telecommunications operators.                                                   

The U.K. international telecommunications market was not fully liberalized  
until 1996. Competition was introduced into this market from 1993 onwards       
through licensing of international simple resellers and other public operators  
which were allowed to buy international private leased circuits by means of     
which they could provide services to the public. In addition to BT and Mercury  
there are over 40 other companies in the U.K. which presently hold licenses     
authorizing the operation of systems which may be connected to foreign          
systems. Some of these other new international licensees such as Energis and    
WorldCom have commenced installing new international cables. The Company        
believes that new market entrants will drive down costs and potentially extend  
opportunities not only in the U.K. national long distance and wholesale         
sectors but also in the U.K. international markets.                             

Germany. The market for international telecommunications in Germany has     
historically been dominated by the German ITO, Deutsche Telecom. Mannesmann     
Arcor, Viag Interkom, as well as o.tel.o GmbH a consortium of German utilities  
companies, have commenced construction of a facilities-based digital long       
distance networks that are expected to offer a broad range of voice and data    
services in competition with Deutsche Telecom. In addition, other competitors   
have entered the market, including WorldCom/MFS which is operating local fiber  
loops in various metropolitan areas in Germany such as Frankfurt/Main in the    
Frankfurt region.                                                               

Switzerland. The international telecommunications market in Switzerland has 
been historically dominated by the ITO, Swisscom. Although Switzerland is not   
a member of the EU, its government has announced that it will voluntarily       
conform to the EU objective of deregulating telecommunications markets and      
allowing cross border competition. Swisscom is a member of the Unisource        
consortium. Global One has established a presence in Switzerland and is         
currently offering private network services to large, corporate and             
institutional customers. The Company believes that it is the primary            
competitor to Swisscom for international voice services in Switzerland.         

Sweden. The telecommunications market in Sweden is among the most           
deregulated in the world. Sweden has liberalized its telecommunications market  
so that competitors, led by Tele-2, accounted for approximately 30% of the      
market in 1995. Telia is a member of the Unisource consortium and is also       
authorized to provide facilities-based and resold services between the United   
States and Sweden. The Company believes it will have opportunities to enter     
into resale agreements with one or more companies in Sweden which will allow    
it to offer fully transparent access to the TIGN and possibly national long     
distance service as well.                                                       

Hong Kong. HKTI currently holds an exclusive license until September 30,    
2006 to provide a variety of international services including the right to      
operate an international gateway for the handling of all outgoing and           

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incoming international calls. There are four local fixed telephone network      
operators, including the former monopoly, Hong Kong Telephone Company, that     
have been licensed by the Office of the Telecommunications Authority ("OFTA"),  
the Hong Kong regulator. Despite the fact that HKTI has the exclusive right     
under its license to provide international telephone services, all three of     
the new local fixed network operators have in recent years gained a             
significant share of the international long distance call market by utilizing   
U.S. and Canada-based call-reorigination services. Effective July 1, 1997,      
control of Hong Kong reverted to China, and it is unclear what effect, if any,  
this will have on the Company's operations in Hong Kong. See "Risk Factors--    
Substantial Government Regulation" and "Business--Government Regulation."       

Australia. The market for international telecommunications services in      
Australia has historically been dominated by Telstra. A smaller share of the    
market is held by a new carrier, OPTUS. In the last two years, switched and     
switchless service providers have increased their market share of               
international telecommunications in Australia from 3.4% to 14%, largely at the  
expense of Telstra. Recently, AAPT and Axicorp, a division of Primus, have      
leased nationwide network capacity to compete with the two ITOs. Legislation    
in effect until June 30, 1997 prohibited service providers from installing and  
maintaining line links between specific locations in Australia. Open            
competition commenced on July 1, 1997, under the Australian Telecommunication   
Act, subject to certain conditions.                                             

Japan. The market for international long distance telecommunications        
services in Japan has historically been dominated by the Japanese ITO, KDD. In  
recent years, IDC and ITJ have grown rapidly and each have captured             
approximately 17% of the market. Recently, it was announced that NTT, the       
dominant provider of local and long distance services in Japan that was         
prohibited from entering the international market, would be split into three    
companies, including one international service provider. It was also announced  
that ITJ will merge with a domestic Japanese carrier, Japan Telecom, Inc., and  
that KDD will operate a joint venture with DDI, another domestic Japanese       
carrier. Additionally, several smaller companies have entered the Japanese      
market in the last few years offering call-reorigination services.              

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BUSINESS  

OVERVIEW                                                                        

Telegroup is a leading global provider of long distance telecommunications  
services. The Company offers a broad range of discounted international,         
national, value-added wholesale and enhanced telecommunications services to     
approximately 268,000 small and medium-sized business, residential and          
wholesale customers in over 180 countries worldwide. Telegroup has achieved     
its significant international market penetration by developing what it          
believes to be one of the most comprehensive global sales, marketing and        
customer service organizations in the global telecommunications industry. The   
Company operates a reliable, flexible, cost-effective, digital, facilities-     
based network, the Telegroup Intelligent Global Network, consisting of 19       
Excel, NorTel or Harris switches, five enhanced services platforms, owned and   
leased capacity on seven digital fiber-optic cable links, leased parallel data  
capacity and the Company's Network Operations Centers in Fairfield, Iowa.       
According to FCC statistics based on 1996 revenue, Telegroup was the            
thirteenth largest U.S. long distance carrier in 1996. Telegroup's revenues     
have increased from $29.8 million in 1993 to $213.2 million in 1996 and $303.9  
million for the twelve months ended September 30, 1997. In 1993, the Company    
had an operating loss of $0.4 million and a net loss of $0.7 million, compared  
to operating income of $0.1 million and a net loss of $0.1 million in 1996.     

Telegroup provides an extensive range of telecommunications services on a   
global basis under the Spectra, Global Access and other brand names. The        
Company's services are typically priced competitively with the services of      
other alternative telecommunications providers and below the prices offered by  
the ITOs, which are often government-owned or protected telephone companies.    
While the Company offers a broad range of telecommunications services, the      
services offered in a particular market vary depending upon regulatory          
constraints and local market demands. Telegroup historically has offered        
traditional call-reorigination service (also known as callback) to penetrate    
international markets having regulatory constraints. As major markets continue  
to deregulate, the Company continues to migrate an increasing portion of its    
customer base to "call-through" service, which includes conventional            
international long distance service and a "transparent" form of call-           
reorigination. The Company markets its call-through service under the brand     
name Global Access Direct and its traditional call-reorigination service under  
the brand name Global Access CallBack. Currently, the Company offers both       
international and national long distance service, prepaid and postpaid calling  
cards, toll-free service and enhanced services such as fax store and forward,   
fax-mail, voice-mail and call conferencing. The Company believes its broad      
array of basic and enhanced services enables the Company to offer a             
comprehensive bundled solution to its customers' telecommunications needs. The  
Company also resells switched minutes and enhanced service platforms on a       
wholesale basis to other telecommunications providers and carriers. See "--     
Services."                                                                      

Telegroup's extensive sales, marketing and customer service organization    
consists of a worldwide network of independent agents and an internal sales     
force who market Telegroup's services and provide customer service, typically   
in local languages and in accordance with the cultural norms of the countries   
and regions in which they operate. The Company's local sales, marketing and     
customer service organization permits the Company to continually monitor        
changes in each market and quickly modify service and sales strategies in       
response to changes in particular markets. In addition, the Company believes    
that it can leverage its global sales and marketing organization to quickly     
and efficiently market new and innovative service offerings. As of November     
30, 1997, the Company had approximately 1,375 independent agents worldwide.     
Twenty-eight Country Coordinators are responsible for coordinating Telegroup's  
operations, including sales, marketing, customer service and independent agent  
support, in 72 countries. In addition, the Company has 31 internal sales        
personnel in the United States and one each in France, Germany and the United   
Kingdom, and intends to establish additional internal sales departments in      
selected core markets. The Company believes that its comprehensive global       
sales, marketing and customer service organization will enable the Company to   
increase its market share and position itself as the leading international      
long distance provider in each of its target markets. The Company believes      
that it is the largest alternative international long distance provider in      
three of the largest                                                            

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international telecommunications markets in the world--France, the Netherlands  
and Switzerland. See "--Sales, Marketing and Customer Service."                 

The Telegroup Intelligent Global Network includes a central Network         
Operations Center in Iowa City, Iowa, as well as switches, owned and leased     
transmission capacity and a proprietary distributed intelligent network         
architecture. The TIGN is designed to allow customer-specific information,      
such as credit limits, language selection, waiting voice-mail and faxes, and    
speed dial numbers to be distributed efficiently over a parallel data network   
wherever Telegroup has installed a TIGN switch. In addition, the open,          
programmable architecture of the TIGN allows the Company to rapidly deploy new  
features, improve service quality, and reduce costs through least cost          
routing. As of December 15, 1997, the TIGN consisted of (i) the Network         
Operations Center, (ii) 19 Excel, NorTel or Harris switches in New York City,   
Jersey City, New Jersey, London, Paris, Amsterdam, Zurich, Copenhagen,          
Frankfurt, Hong Kong, Sydney, Tokyo and Milan, (iii) five enhanced services     
platforms in New York, Hong Kong, London, Paris and Sydney, (iv) owned and      
leased fiber-optic cable links connecting its New York and New Jersey switches  
to its switches in London, Amsterdam, Sydney and Los Angeles, and its London    
switches to its switches in Paris and Amsterdam, and (v) leased parallel data   
transmission capacity connecting Telegroup's switches to each other and to the  
networks of other international and national carriers. The Company intends to   
further develop the TIGN by upgrading existing facilities and by adding         
switches and transmission capacity principally in and between major markets     
where the Company has established a substantial customer base. See "--Network   
and Operations."                                                                

MARKET OPPORTUNITY                                                              

The global market for international telecommunications equipment and        
services is undergoing significant deregulation and reform. The industry,       
which provides voice and data communication world wide, is being shaped by the  
following trends: (i) deregulation and privatization of telecommunications      
markets worldwide; (ii) diversification of services through technological       
innovation; and (iii) globalization of major carriers through market            
expansion, consolidation and strategic alliances. As a result of these          
factors, it is anticipated that the industry will experience considerable       
growth in the foreseeable future, both in terms of traffic volume and revenue.  
According to the ITU Report, trade in the international telecommunications      
industry, including sales of equipment and services, is projected to exceed $1  
trillion in 1998. International telecommunications services, defined as sales   
of services across national borders, accounted for $52.8 billion in revenues    
and 60.3 billion minutes of use in 1995, increasing from $21.7 billion in       
revenues and 16.7 billion minutes of use in 1986, which represents compound     
annual growth rates of 10% and 15%, respectively. The ITU estimates for total   
cross-border telecommunications trade in 1996 are in excess of $100 billion.    
The ITU projects that revenues from global telecommunications services will     
exceed $900 million in the year 2000.                                           

Deregulation and Privatization of Telecommunications Markets                
Worldwide. Significant legislation and agreements have been adopted since the   
beginning of 1996 which are expected to lead to the liberalization of the       
majority of the world's telecommunication markets, including:                   

The U.S. Telecommunications Act, signed in February 1996, establishes   
parameters for the implementation of full competition in the U.S. national  
long distance market.                                                       

The EU Full Competition Directive, adopted in March 1996, abolishes     
exclusive rights for the provision of Voice Telephony services throughout   
the EU and the PSTNs of any member country of the EU by January 1, 1998,    
subject to extension by certain EU member countries.                        

The World Trade Organization Agreement, signed in February 1997, creates
a framework under which more than 60 countries have committed to liberalize 
their telecommunications laws in order to permit increased competition and, 
in most cases, foreign ownership in their telecommunications markets,       
beginning in 1998. The 69 governments participating in the WTO              
telecommunications negotiations on basic telecommunications services        
account for over 90% of global market telecommunications services,          
according to the ITU Report.                                                

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The 1997 Australian Telecommunications Act, adopted in March 1997, opens
the Australian market up to greater competition in the provision of         
telecommunications services over a company's own telephone lines.           

The Company believes that the foregoing initiatives, as well as other       
proposed legislation and agreements, will result in reduced restrictions on     
the ability of alternative carriers such as Telegroup to provide                
telecommunications services in the subject markets. In many markets, Telegroup  
believes that long distance callers have been charged relatively high,          
uncompetitive prices by the ITOs in exchange for limited services. The ITU's    
projections for substantially increased international minutes of use and        
revenue by the year 2000 are based in part on the belief that reduced pricing   
as a result of deregulation and competition will result in a substantial        
increase in the demand for telecommunications services in most markets.         
Telegroup believes that its comprehensive global sales, marketing and customer  
service organization uniquely positions it among alternative                    
telecommunications providers to capitalize on the opportunities presented by    
these reduced restrictions. Telegroup also believes that such global            
regulatory reform will expand the availability of transmission capacity,        
enabling Telegroup to strategically add transmission capacity to its network    
in order to reduce its cost of sales through least cost routing.                

Diversification of Services through Technological Innovation. The           
deregulation of telecommunications markets throughout the world has coincided   
with substantial technological innovation. The proliferation of digital fiber-  
optic cable in and between major markets has significantly increased            
transmission capacity, speed and flexibility. Improvements in computer          
software and processing technology have enabled telecommunications providers    
to offer a broad range of enhanced voice and data services. Unlike many         
established telecommunications providers, the Company is not encumbered by      
large, inflexible legacy switching systems. The TIGN uses primarily open-       
architecture Excel switches which can be programmed to meet the specifications  
of new enhanced service platforms. The Company believes that expansion of the   
TIGN will enable it to deliver a flexible, comprehensive set of enhanced        
telecommunications services to meet the evolving needs of its global customer   
base.                                                                           

Globalization of Major Carriers through Market Expansion, Consolidation and 
Strategic Alliances. Faced with the prospect of declining market share in       
their respective markets, AT&T and several of the European ITOs have sought     
out alternative sources of revenue by expanding into new markets.               
Additionally, certain ITOs have pursued mergers, acquisitions and other         
strategic alliances, such as the proposed BT/MCI merger and the formation of    
the Global One and Unisource consortia, to provide telecommunications services  
in additional markets. Telegroup believes that it is uniquely positioned to     
take advantage of these trends in the global telecommunications marketplace.    
As telecommunications markets are deregulated, the Company believes that its    
global sales, marketing and customer service organization and the design of     
the TIGN will enable the Company to expand its customer base and its service    
offerings in existing and new markets, and to reduce its cost of transmission   
service obtained from other carriers. The Company believes that it will be      
better able to negotiate favorable alternative transit/termination agreements   
with facilities-based carriers or consortia in multiple markets because of its  
large, globally distributed customer base and substantial traffic volumes.      

BUSINESS STRATEGY                                                               

Telegroup's objective is to become the leading provider of                  
telecommunications services to small and medium-sized business and high-volume  
residential customers in its existing core markets and in selected target       
markets. Telegroup's strategy for achieving this objective is to deliver        
additional services to customers in its markets through the continued           
deployment of the TIGN and to expand its sales and marketing organization into  
new target markets. The Company's business strategy includes the following key  
elements:                                                                       

Expand the Telegroup Intelligent Global Network. Telegroup is currently     
expanding the TIGN by installing additional switches, purchasing ownership in   
additional fiber-optic cable and leasing additional dedicated transmission      
capacity in strategically located areas of customer concentration in Western    
Europe and the Pacific Rim. Through September 30, 1997, the Company has         
invested over $16.2 million in network facilities,                              

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and the Company anticipates the investment of an additional $40.3 million in    
network facilities with the net proceeds of the IPO, the Convertible Notes,     
and the Old Notes. During the next 15 months, the Company has scheduled the     
installation of additional switches in the United States, Spain, New Zealand,   
Korea, El Salvador and Brazil, and nodes in the United States, Sweden, Norway,  
Belgium, Greece and Austria. Telegroup will continue to purchase ownership in   
additional fiber-optic cables and lease additional dedicated transmission       
capacity to reduce the Company's per minute transmission costs. The Company's   
ability to achieve these goals is dependent upon, among other things, its       
ability to raise additional financing. See "Risk Factors--Need for Additional   
Financing." The Company believes the expansion of the TIGN will enable          
Telegroup to continue to migrate customers from traditional call-reorigination  
services to Global Access Direct. In order to maximize the Company's return on  
invested capital, the Company employs a success-based approach to capital       
expenditures, locating new switching facilities in markets where the Company    
has established a customer base by marketing its call-reorigination services.   

Maximize Operating Efficiencies. Telegroup intends to reduce its costs of   
providing telecommunications services by strategically deploying switching      
facilities, adding leased and owned fiber-optic capacity and entering into      
additional alternative "transit/termination agreements." This expansion of the  
TIGN will enable the Company to originate, transport and terminate a larger     
portion of its traffic over its own network, thereby reducing its overall       
telecommunications costs. The Company believes that through least cost          
routing, its cost effective Excel LNX switches and its other facilities,        
Telegroup will be able to further reduce the overall cost of its services.      

Expand Global Sales, Marketing and Customer Service Organization. The       
Company believes that its experience in establishing one of the most            
comprehensive global sales, marketing and customer service organizations in     
the global telecommunications industry provides it with a competitive           
advantage. The Company intends to expand its global sales, marketing and        
customer service organization in new and existing markets. In new target        
markets, the Company relies primarily on independent agents to develop a        
customer base while minimizing its capital investment and management            
requirements. As the customer base in a particular market develops, the         
Company intends to selectively acquire the operations of its Country            
Coordinator serving such market and recruit and train additional internal       
sales personnel and independent agents. The Company believes that a direct      
sales and marketing organization complements its existing independent agents    
by enabling Telegroup to conduct test marketing and quickly implement new       
marketing strategies. In addition to its sales offices in France, Germany and   
the United Kingdom, the Company intends to open or acquire additional offices   
in target markets in Europe and the Pacific Rim during 1997 or 1998.            

Position Telegroup as a Local Provider of Global Telecommunications         
Services. Telegroup is one of the only alternative telecommunications           
providers that offers in-country and regional customer service offices in       
major markets on a global basis. At November 30, 1997, the Company had 28       
Country Coordinators providing customer service in 72 countries. Telegroup      
believes this local presence provides an important competitive advantage,       
allowing the Company to tailor customer service and marketing to meet the       
specific needs of its customers in a particular market. Customer service        
representatives speak the local languages and are aware of the cultural norms   
in the countries in which they operate. The Company continually monitors        
changes in the local market and seeks to quickly modify service and sales       
strategies in response to such changes. In many instances, this type of         
dedicated customer service and marketing is not available to the Company's      
target customer base from the ITOs.                                             

Target Small and Medium-Sized Business Customers. The Company believes that 
small and medium-sized business customers focus principally on obtaining        
quality and breadth of service at low prices and have historically been         
underserved by the ITOs and the major global telecommunications carriers.       
Through the deployment of the TIGN, the Company will continue to migrate        
existing customers from traditional call-reorigination services to Global       
Access Direct, thereby addressing the telecommunications needs of a wider base  
of small and medium-sized business customers. Telegroup believes that, with     
its direct, face-to-face sales force and dedicated customer service, it can     
more effectively attract and serve these business customers.                    

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Pursue Acquisitions, Joint Ventures and Strategic Alliances. The Company    
intends to expand its global sales, marketing and customer service              
organizations, increase its customer base, add network and circuit capacity,    
enter additional markets and develop new products and services through          
acquisitions, joint ventures and strategic alliances. The Company seeks to      
acquire controlling interests in companies that have established marketing      
organizations, existing customer bases, complementary network facilities, new   
services or technologies and experienced management teams. In addition, the     
Company intends to make selective acquisitions of its Country Coordinators'     
operations in order to lower its selling, general and administrative expense    
and increase control over this distribution channel. The Company also expects   
to acquire the operations of other agents and marketing groups. The Company     
also intends to enter into joint ventures and strategic alliances with          
selected business partners to enable the Company to enter additional markets    
and to complement the Company's current operations and service offerings. The   
Company is continuously reviewing opportunities and believes that such          
acquisitions, joint ventures and strategic alliances are an important means of  
expanding its network and increasing network traffic volume, both of which are  
expected to lower its overall cost of telecommunications services.              

Broaden Market Penetration through Enhanced Service Offerings. The Company  
believes that offering a broad array of enhanced services is essential to       
retain existing customers and to attract new customers. The TIGN's enhanced     
services platform and its distributed intelligent network architecture permit   
the Company to provide a broad array of voice, data and enhanced services and   
to efficiently distribute customer information, such as language selection,     
waiting voice-mail and faxes and speed dial numbers throughout the TIGN. The    
Company offers a comprehensive solution to its customers' telecommunications    
needs by providing enhanced services, including fax store and forward, fax-     
mail, voice-mail and call conferencing and intends to introduce e-mail-to-      
voice-mail translation and voice recognition services. Telegroup believes that  
its provision of such enhanced services will enable it to increase its revenue  
from existing customers and to attract a broader base of small and medium-      
sized business customers. The Company's investment in PCS is expected to serve  
as the basis for providing enhanced services for the TIGN.                      

CUSTOMERS                                                                       

Telegroup's worldwide retail customer base is comprised of residential      
customers and small to medium-sized businesses with monthly bills averaging     
between $50 and $5,000. At September 30, 1997, Telegroup had approximately      
216,000 active retail customers (those that incurred charges during September   
1997), consisting of approximately 49,000 U.S. domestic and approximately       
167,000 international customers. In addition, Telegroup markets its wholesale   
services to both facilities-based carriers and switched-based long distance     
providers that purchase the Company's service for resale to their own           
customers. As of September 30, 1997, Telegroup had 26 active wholesale carrier  
customers.                                                                      

The following chart sets forth the Company's combined retail and wholesale  
revenues for the nine months ended September 30, 1997 for each of the           
Company's ten largest markets, determined by customers' billing addresses:      

                                                                [Download Table]

                                               NINE MONTHS                   
                                                  ENDED                      
                                            SEPTEMBER 30, 1997 PERCENTAGE OF 
COUNTRY                                         REVENUES       TOTAL REVENUES
-------                                     ------------------ --------------
                                                (MILLIONS)                   
                                                                             
United States..............................       $81.5             34.2%    
Hong Kong..................................        35.0             14.7     
Netherlands................................        18.2              7.6     
Australia..................................        11.8              4.9     
France.....................................        11.1              4.7     
Switzerland................................         9.8              4.1     
Germany....................................         8.1              3.4     
Sweden.....................................         6.5              2.7     
Japan......................................         5.1              2.1     
Denmark....................................         4.5              1.9     

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For the nine months ended September 30, 1997, the Company's revenues from   
retail and wholesale customers represented 71% and 29%, respectively, of the    
Company's total revenues. This compared with 84% and 16%, respectively, for     
the year ended December 31, 1996.                                               

Retail Customers. The Company's retail customer base is diversified both    
geographically and by customer type. No single retail customer accounted for    
more than 1% of the Company's total revenues for the year ended December 31,    
1996 or for the nine months ended September 30, 1997. The Company's sales and   
marketing efforts target high-volume residential consumers and small and        
medium-sized businesses. The Company believes that high-volume residential      
consumers are attracted to Telegroup's services because of its significant      
price savings as compared to first-tier carriers, its simplified price          
structure and its variety of service offerings. The Company believes that       
small and medium-sized businesses are attracted to Telegroup's services         
because of significant price savings compared to first-tier carriers, and       
because of its personalized approach to customer service and support,           
including its local presence, customized billing and enhanced service           
offerings.                                                                      

Wholesale Customers. Telegroup's wholesale marketing targets second- and    
third-tier international and telecommunications providers. The Company          
currently provides wholesale services to a total of 26 customers, of which 24   
are U.S.-based providers and two are international providers. The Company       
believes that long distance services, when sold to telecommunications carriers  
and other resellers, are generally a commodity product with the purchase        
decision based primarily on price. Sales to these other carriers and resellers  
help the Company maximize the use of its network and thereby minimize fixed     
costs per minute of use.                                                        

For the nine months ended September 30, 1997, one wholesale customer in Hong
Kong accounted for approximately 12% of the Company's total revenues.           
Substantially all of the services provided by the Company to this customer      
consist of call-reorigination services. The initial term of the Company's       
agreement with the Hong Kong Customer expires in October 1998, automatically    
renews for one year periods, and may be terminated by the Hong Kong Customer    
if it determines in good faith that the services provided pursuant to the       
agreement are no longer commercially viable in Hong Kong. If the Company loses  
its rights under its PNETS license and/or if it is unable to provide call-      
reorigination services in Hong Kong on either a retail or wholesale basis,      
such action could have a material adverse effect on the Company's business,     
financial condition and results of operations. Similarly, a material reduction  
in the level of services provided by the Company to the Hong Kong Customer or   
a termination of the Company's agreement with the Hong Kong Customer could      
have a material adverse effect on the Company's business, financial condition   
and results of operations. In addition, China resumed sovereignty over Hong     
Kong as of July 1, 1997. See "Risk Factors--Substantial Government              
Regulation--The Pacific Rim."                                                   

SALES, MARKETING AND CUSTOMER SERVICE                                           

Telegroup's global sales, marketing and customer service organization       
consists of Country Coordinators, independent agents and an internal sales      
force who market Telegroup's services and provide customer service in local     
languages and in accordance with the cultural norms of the countries in which   
they operate. The Company's local sales, marketing and customer service         
organization allows the Company to continually monitor changes in each market   
and quickly modify service and sales procedures in response to market changes.  
Since its inception, Telegroup's sales, marketing and customer service          
strategy has been based on providing its network of agents and salespeople      
with the systems, technology and infrastructure to attract and support          
customers as efficiently as possible.                                           

Global Independent Agent Network. Telegroup's international market          
penetration has resulted primarily from the sales activities of independent     
agents compensated on a commission-only basis. As of November 30, 1997,         
Telegroup had approximately 1,375 independent agents located worldwide. The     
use of independent agents has allowed the Company to limit marketing expenses   
and customer acquisition costs. See "Risk Factors--Dependence on Independent    
Agents; Concentration of Marketing Resources."                                  

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The Company's agreements with its independent agents typically provide for a
two-year term and require the agents to offer the Company's services at rates   
prescribed by the Company and to abide by the Company's marketing and sales     
policies and rules. Independent agent compensation is paid directly by the      
Company and is based exclusively upon payment for the Company's services by     
customers obtained for Telegroup by the independent agents. The commission      
paid to independent agents ranges between five to twelve percent of revenues    
received by the Company and varies depending on individual contracts, the       
exclusivity of the agent and the type of service sold. Independent agents are   
responsible for up to 40% of bad debt attributable to customers they enroll.    
The Company's agreements with its independent agents typically provide that     
the agents have no authority to bind Telegroup or to enter into any contract    
on the Company's behalf.                                                        

Country Coordinators. In significant international markets, Telegroup       
appoints Country Coordinators. Country Coordinators are typically self-         
financed, independent agents, with contracts that bind them exclusively to      
Telegroup. Country Coordinators also have additional duties beyond marketing    
Telegroup services, including the responsibility in a country or region to      
coordinate the activities of Telegroup independent agents, including training   
and recruitment, customer service and collections. As of November 30, 1997,     
Telegroup had 28 Country Coordinators who were responsible for sales,           
marketing, customer service and collections in 72 countries. Telegroup has      
begun to vertically integrate its sales, marketing and customer service         
operations by opening offices in Germany and the U.K. which provide the         
services of a Country Coordinator and, in August 1996, acquired the business    
operations of its Country Coordinator in France.                                

Country Coordinators offer the Company's services at rates prescribed by the
Company, and enforce standards for all advertising, promotional, and customer   
training materials relating to Telegroup's services that are used or            
distributed in the applicable country or region. Country Coordinators review    
all proposed marketing or advertising material submitted to them by the         
independent agents operating in their country or region and ensure such         
agents' compliance with the Company's standards and policies. The Company's     
agreements with its independent Country Coordinators typically have a two-year  
term and include an exclusivity provision restricting the Country               
Coordinator's ability to offer competing telecommunication services. Such       
agreements typically entitle the Country Coordinator to an override based on a  
percentage of revenues collected by Telegroup from customers within the         
Country Coordinator's country or region, as well as a commission similar to     
the commission paid to independent agents with respect to customers obtained    
directly by the Country Coordinator. The Company's agreements with its Country  
Coordinators typically provide that the agents have no right to enter into any  
contract on Telegroup's behalf or to bind Telegroup in any manner not           
expressly authorized in writing. See "Risk Factors--Dependence on Independent   
Agents" and "--Agreements with Independent Agents."                             

Internal Sales Department. In early 1993, Telegroup began the development of
an internal sales force which, as of September 30, 1997, numbered 34 persons,   
including 31 in the U.S. and one each in Germany, France and the United         
Kingdom. The internal sales department, which is fully dedicated to marketing   
Telegroup's services, provides increased control over existing customers and    
enables the Company to quickly test new products and implement special          
marketing campaigns. For the nine months ended September 30, 1997, Telegroup's  
internal sales department was responsible for generating approximately 41.0%    
of the Company's revenues from U.S. retail customers, with the balance being    
generated by independent agents in the U.S. Internal sales representatives are  
compensated by means of a base salary and a commission which varies depending   
upon the type of services sold.                                                 

The Internet. In March 1995, Telegroup implemented an aggressive program to 
use the World Wide Web as a marketing, order entry, and information             
distribution tool. The Company currently processes approximately 90% of orders  
submitted by its independent agents through its Web-based RepLink order entry   
system. RepLink allows for customer provisioning in approximately 30 minutes    
and provides agents with real-time access to customer information. In           
addition, the Company's World Wide Web site provides a central source of        
information about Telegroup, easily accessible to Telegroup's agents and        
prospective customers around the world.                                         

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Customer Service. Telegroup is committed to providing its customers with    
high-quality customer service, provided in the local language and in            
accordance with local cultural norms. As of September 30, 1997, Telegroup       
directly provided customer service to customers in 107 countries, 24 hours a    
day, 365 days a year, from its headquarters in Fairfield, Iowa. In addition,    
Telegroup currently has 28 Country Coordinators, each of whom maintains a       
customer service office. These offices provide customer support to Telegroup's  
customers in 72 countries.                                                      

Customer service offices are equipped with Telegroup customer service and   
sales support systems for use in the country or region. Customer service        
representatives can access the Company's "RepLink" order entry system and       
Integrated Databases ("IDB"), a customer information database. See "Management  
Information Systems." These systems facilitate and expedite customer            
provisioning and changes to customer account information. In addition,          
selected customer service offices are connected to Telegroup's Fairfield, Iowa  
headquarters by high-speed frame relay data links which provide real-time       
access to the Company's central databases.                                      

SERVICES                                                                        

Telegroup offers a broad array of telecommunications services through the   
TIGN and through interconnections with the networks of other carriers. While    
the Company offers a broad range of telecommunications services in each of its  
markets, the services offered in a particular market vary depending upon        
regulatory constraints and local market demands. In order to create a global    
brand identity, the Company markets its products primarily under the Spectra    
or Global Access brands in virtually all of its markets. The Company currently  
offers the following services:                                                  

International Long Distance. The Company provides international voice   
services to its customers in over 180 countries. On a market-by-market      
basis, access methods required to originate a call vary according to        
regulatory requirements and the existing national telecommunications        
infrastructure. The Company's call-reorigination services are available in  
all of its markets, generally under the brand name Global Access CallBack.  
Telegroup is actively migrating customers to Global Access Direct service,  
which is currently available through TIGN switches located in Hong Kong,    
France, the U.K. and the Netherlands. Global Access Direct provides         
Telegroup customers call-through service, which includes the provision of   
long distance service through conventional international long distance or   
through a "transparent" form of call-reorigination.                         

National Long Distance. The Company currently provides national long    
distance service in the United States and Australia. The Company also       
expects to provide national long distance service in New Zealand and the    
U.K. by the end of 1997.                                                    

 Prepaid (Debit) and Postpaid Calling Cards. The Company's prepaid (debit)
and postpaid Global Access Telecard may be used by customers for            
international telephone calls from more than 60 countries to substantially  
all other countries in the world. These calling cards also enable the       
Company's customers to access Telegroup's enhanced services.                

Toll-free Services. The Company currently provides domestic toll-free   
services within the United States under its Spectra 800 brand, and toll-    
free services for calls to overseas businesses which are originated in the  
United States and Canada, under its Global Access 800 brand.                

Enhanced Services. Telegroup's enhanced services include fax store and  
forward, fax-mail, voice-mail, and call conferencing.                       

Wholesale Services. In addition to retail services, the Company provides
international and national call termination services and enhanced services  
on a wholesale basis to switch-based telecommunications carriers in the     
United States, the Pacific Rim and Europe. Such wholesale arrangements      
typically involve the purchase of transmission services on a per-minute     
basis, with rates varying according to the destination country and the time 
of day the call is placed.                                                  

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Telegroup constantly evaluates potential new service offerings in order to  
increase customer retention and loyalty, and increase usage of the Company's    
services. New services the Company expects to introduce in selected markets in  
1998 include:                                                                   

Internet Access Services. The Company intends to offer switched and     
dedicated access to the Internet for use by commercial and residential      
customers. These services may be offered on a direct connection to the      
Internet or on a resale basis. Once connected to the Internet, customers    
will be able to access services provided by others, such as World Wide Web  
browsing, electronic mail, news feeds and bulletin boards.                  

Resold Local Switched and Switchless Service. The Company intends to    
provide local service on a resale basis in the United States, subject to    
commercial feasibility and regulatory limitations.                          

Mobile Resale. The Company intends to offer its customers resold mobile 
telecommunications services in the United States and other selected         
markets.                                                                    

Integrated Voice-Mail, E-Mail and Fax-Mail. Integrated services enable  
customers to convert e-mail and facsimile data to audio text and to receive 
voice-mail messages in writing. The Company intends to offer its customers  
integrated voice-mail, e-mail and fax-mail through the TIGN in all          
countries where the Company's international telecommunications services are 
available.                                                                  

There can be no assurance that the Company will be able to launch such      
services or that, if launched, such services will be successful.                

NETWORK AND OPERATIONS                                                          

The TIGN employs digital switching and fiber-optic technologies, runs on    
proprietary software developed by Telegroup and is supported by comprehensive   
monitoring and technical services at the Company's Network Operations Center    
in Iowa City, Iowa. The TIGN also employs Telegroup's proprietary distributed   
intelligent network architecture, enabling Telegroup to transmit customer-      
specific information among its switches almost instantaneously over redundant   
high-speed frame relay data networks.                                           

Through the TIGN, Telegroup is able to deliver an expanded set of enhanced  
services which may not be available from the ITO in a particular country. The   
availability of these enhanced services enables Telegroup to attract a wider    
base of small to medium-sized business customers. In addition, the network      
provides the Company with more efficient call routing and cost savings by       
means of reduced circuit charges.                                               

History of the TIGN. In 1992, the Company installed its first Harris switch 
at its main office in Fairfield, Iowa primarily to serve as a PBX for internal  
Company purposes. Since 1992, Telegroup has invested substantial resources in   
developing the TIGN and related business operations. In 1993, the Company       
installed a switch in New York City to handle call-reorigination service for    
retail customers. In 1994, the Company installed a Harris switch in London to   
provide call-reorigination services for intra-European calls and leased a       
private data line for call setup and to transfer call detail reports from the   
U.K. switch to the New York switch. In February 1995, Telegroup entered into    
an operating agreement with AT&T-Canada (formerly Unitel) providing for         
correspondent traffic termination rights.                                       

In July 1995, the Company installed its first enhanced services switch at   
the New York switch site to provide post-paid card services for domestic and    
international customers in 40 countries. Also in 1995, Telegroup opened a new   
office in Iowa City, Iowa to house the Network Operations Center and switch     
development and deployment teams.                                               

In February 1996, the Company installed its first Excel switch in Hong Kong 
in addition to an identical mated switch in New York to provide Global Access   
Direct service to Hong Kong customers using transparent call-reorigination. In  
May 1996, Telegroup began to utilize the existing Harris switch at the main     
office to receive incoming call-reorigination calls from international          
customers. In September 1996, the Company installed a DMS-250 switch in New     
York. The DMS-250 switch was connected via T-1 lines to other carriers whereby  

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wholesale traffic was brought in to the DMS-250 switch and then routed to       
other carriers for international termination. In August 1996, the Company       
installed a Harris switch in Amsterdam incorporating proprietary software       
developed by the Telegroup Intelligent Network Department to provide Global     
Access Direct service to international customers.                               

In January 1997, the Company installed another pair of Excel switches in    
Hong Kong and New York, linked by the existing data network. Shortly            
thereafter, TIGN switches were installed in France and Australia, opening       
those markets to Global Access Direct services. At the same time, the Company   
acquired an interest in the CANTAT-3 Trans-Atlantic circuit between New York    
and London.                                                                     

Current Network Architecture. As of December 15, 1997, the TIGN consisted of
(i) the central NOC, (ii) 19 operational Excel, NorTel or Harris switches in    
New York City, Jersey City, New Jersey, London, Paris, Amsterdam, Zurich,       
Copenhagen, Frankfurt, Hong Kong, Sydney, Tokyo and Milan, (iii) five enhanced  
services platforms in New York, Hong Kong, London, Paris and Sydney, (iv)       
owned and leased fiber-optic cable links connecting its New York and New        
Jersey switches to its switches in London, Amsterdam, Sydney and Los Angeles,   
and its London switches to its switches in Paris and Amsterdam, and (v) leased  
parallel data transmission capacity connecting Telegroup's switches to each     
other and to the networks of other international and national carriers. The     
Company intends to further develop the TIGN by upgrading existing facilities    
and by adding switches and transmission capacity principally in and between     
major markets where the Company has already established a substantial customer  
base. See "--Business Strategy."                                                

In markets in which the Company believes it is not optimal to own or lease  
network facilities, the Company typically enters into agreements to resell the  
facilities of other carriers. The Company purchases switched minute capacity    
from various carriers and depends on such agreements for termination of         
traffic from the TIGN. The Company is also a reseller of other carriers'        
national long distance services. As a result of the Company's strategic         
relationship with AAPT in 1997, the Company is a reseller of Australian         
national long distance services. In other markets, the Company works with       
multiple national long distance carriers in an effort to ensure that the        
pricing and service on each route are the best available and that the Company   
can provide an integrated long distance service to its customers. The Company   
believes that the opportunities for resale will become increasingly attractive  
as countries deregulate and grant additional carrier licenses, and competitive  
pressures force carriers to find alternative sources of distribution. See       
"Risk Factors--Dependence on Telecommunications Facilities Providers."          

In general, the Company relies upon other carriers' networks to provide     
redundancy in the event of technical difficulties on the TIGN. The Company      
believes that the strategy of using other carriers' networks for redundancy is  
currently more cost-effective than purchasing or leasing its own redundant      
capacity. To the extent that the traffic over the TIGN exceeds the Company's    
transmission capacity, the Company typically routes overflow traffic over       
other carriers' networks, which may result in reduced margins on such calls.    

The TIGN's Distributed Intelligent Network Architecture. Most               
telecommunications companies operate their networks using software developed    
by switch manufacturers. Consequently, switch software typically cannot be      
modified or improved except by the switch manufacturer, which can result in     
significant expense and delay. Through its Intelligent Network Department,      
consisting of approximately 80 full-time employees, Telegroup develops and      
continuously refines its proprietary TIGN software, enabling the Company to     
purchase flexible, open-architecture switching hardware into which it           
incorporates such software.                                                     

TIGN Competitive Advantages. The TIGN platform is designed to provide a     
highly reliable, flexible and cost-effective network for processing calls and   
delivering enhanced services. The design of the TIGN achieves the principles    
established for Advanced Intelligent Networks ("AIN") specified by the ITU.     
The TIGN platform provides significant competitive advantages over voice        
networks of other providers. These advantages include:                          

.  Distributed intelligence. The TIGN voice network is configured in        
 parallel with a frame relay data network for call setup and the sharing
of customer data among the TIGN switches. All customer                

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information such as current usage, credit limits, language selections,
waiting voice-mail and faxes, and speed numbers are distributed and   
available throughout the TIGN.                                        

.  Rapid deployment of new services and features. The TIGN software allows  
enhancements to existing services and new services to be quickly      
developed and tested with minimal impact to existing software.        
Enhancements to existing services can be added in days rather than    
months and new services can be developed and tested in a few weeks    
  rather than many months or even years required by other network designs.

.  Cost benefits versus conventional switching platforms. The switching     
  matrix employed within the TIGN platform consists of two redundant Excel
 LNX switches, each with 2000 voice ports--one actively controlling call
processing and one in hot standby mode. This latest generation in     
switching equipment from Excel provides a cost-per-port which is less 
expensive than that found on larger, traditional switching equipment  
used by conventional voice service providers.                         

.  Flexible and adaptive signaling. Because of the many national and        
carrier-specific variants on the international signaling protocol such
as ISDN and CCS7, one of the largest problems faced by international  
carriers and voice service providers has been interconnecting to the  
 national ITOs. The TIGN software has been designed to take advantage of
the open architecture on the Excel LNX switches to facilitate         
compatibility with various international signaling protocols.         

MANAGEMENT INFORMATION SYSTEMS                                                  

Telegroup believes that reliable, sophisticated and flexible billing and    
information systems are essential to remain competitive in the global           
telecommunications market. Accordingly, the Company has invested substantial    
resources to develop and implement information systems. As the Company          
continues to grow, it will need to invest additional capital to enhance and     
upgrade its operating systems in order to meet its provisioning, billing,       
costing and collection requirements. See "Risk Factors--Dependence on           
Effective Management Information Systems."                                      

The Company's information systems include (i) RepLink, an Internet Web-based
global order entry system; (ii) the IDB which stores client information using   
client server architecture; (iii) a Small Business Technologies ("SBT")         
accounting system; (iv) a proprietary customer billing system; and (v) a        
proprietary call costing and reconciliation system which was substantially      
implemented in June 1997. The Company has initiated activity to replace its     
SBT accounting, IDB, and billing systems using commercially available software  
provided by Saville Systems, and PeopleSoft with completion planned for the     
next 12 months. The Company anticipates that it will also enhance, upgrade or   
replace its commissions and possibly other systems in the next 9 to 15 months.  

RepLink Order Entry System. The Company has developed RepLink, a unique     
World Wide Web interface, primarily for its independent agents to send          
customer information to the Company for fully automated provisioning. First     
implemented in 1995, RepLink has reduced the average interval required to       
provision a new customer from most countries to an average of 30 minutes or     
less. Customer information is entered by the agent and screened during the      
provisioning process to ensure data quality and accuracy. Agents can also       
receive monthly usage reports, commission reports, and reports on new products  
and features through RepLink.                                                   

IDB Customer Database. The IDB is the Company's integrated database for all 
customer and service information. The IDB can be accessed through the IDB       
custom user interface, which allows the Company's customer service and sales    
support staff to maintain customer records and provide customer service. The    
IDB interface also allows limited access to a customer's financial information  
which is stored in the Company's SBT accounting system. Customer order          
information is transferred directly from RepLink into the IDB. After final      
data is reviewed, the customer is provisioned for the services requested by     
the agent. Each hour, all provisioning information for Global Access services   
flows automatically to the Company's switches. Several times each day,          
provisioning information for Spectra services is transferred electronically to  
the Company's underlying carriers.                                              

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SBT Accounting System. SBT, a modifiable, multi-user database accounting    
software, provides the Company with the flexibility to create custom            
accounting modules to support various accounting needs. All of SBT's            
accounting products perform real-time posting and provide custom file           
browsers. The IDB and SBT systems are linked by use of an open server through   
which information is freely exchanged. Since the Company's new billing system   
software is compatible with SBT, financial information is able to flow easily   
between the two systems without manual intervention.                            

Billing System. The Company's new billing system streamlines and automates a
number of billing processes, including worldwide call detail data collection.   
A call detail report ("CDR"), an itemized record of the activity which occurs   
at a particular switch location, is downloaded and used in the generation of    
customer invoices. The entire process of CDR import, matching and rating is     
now combined into a single process, eliminating manual intervention. The        
Company is able to review and analyze the CDR to ensure the accuracy of         
customer bills and detect errors. Monthly customer invoices are created,        
printed and mailed from the Company's facilities in Fairfield, Iowa.            

Call Costing and Reconciliation System. To ensure that costs charged to the 
Company by its carriers are accurate, the Company has developed a call costing  
and reconciliation system which was substantially implemented in June 1997.     
This system is designed to reconcile the Company's CDRs against invoices that   
the Company receives from its underlying carriers. Each carrier invoice will    
be compared for total calls, total duration, total cost, and the Telegroup      
rated cost. All discrepancies will be logged and an audit for the carrier/day   
combinations that show discrepancies will be scheduled to examine the details   
of the discrepancies between the Company's data and the carrier's data. See     
"Risk Factors--Dependence on Effective Management Information Systems."         

The Company believes that this suite of management information systems,     
coupled with continued enhancements and additions, will enable the Company to   
effectively provision and bill customers, produce accurate financial reports    
and control costs.                                                              

COMPETITION                                                                     

The international and national telecommunications industry , estimated to   
reach $1 trillion in 1998, is highly competitive. The Company's success         
depends upon its ability to compete with a variety of other telecommunications  
providers in each of its markets, including the respective ITO in each country  
in which the Company operates and global alliances among some of the world's    
largest telecommunications carriers. Other potential competitors include cable  
television companies, wireless telephone companies, Internet access providers,  
electric and other utilities with rights of way, railways, microwave carriers   
and large end users which have private networks. The intensity of such          
competition has recently increased and the Company believes that such           
competition will continue to intensify as the number of new entrants            
increases. If the Company's competitors devote significant additional           
resources to the provision of international or national long distance           
telecommunications services to the Company's target customer base of high-      
volume residential consumers and small and medium-sized businesses, such        
action could have a material adverse effect on the Company's business,          
financial condition and results of operations, and there can be no assurance    
that the Company will be able to compete successfully against such new or       
existing competitors.                                                           

The Company's larger competitors include AT&T, MCI, Sprint, WorldCom,       
Frontier and LCI in the United States; France Telecom in France; PTT Telecom    
B.V. in the Netherlands; Cable & Wireless plc, BT, AT&T, WorldCom, Sprint and   
ACC Corp. in the United Kingdom; Deutsche Telecom in Germany; Swiss PTT in      
Switzerland; Telia AB and Tele-2 in Sweden; HKTI in Hong Kong, Telstra and      
Optus in Australia; and KDD, IDC and ITJ in Japan. The Company competes with    
numerous other long distance providers, some of which focus their efforts on    
the same customers targeted by the Company. In addition to these competitors,   
recent and pending deregulation in various countries may encourage new          
entrants. For example, as a result of the recently enacted 1996                 
Telecommunication Act in the United States, once certain conditions are met,    
RBOCs will be allowed to enter the domestic long distance market in their       
exchange territories, AT&T, MCI and other long                                  

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distance carriers will be allowed to enter the local telephone services         
market, and any entity (including cable television companies and utilities)     
will be allowed to enter both the local service and long distance               
telecommunications markets. Moreover, while the recently completed WTO          
Agreement could create opportunities for the Company to enter new foreign       
markets, implementation of the accord by the United States could result in new  
competition from ITOs previously banned or limited from providing services in   
the United States. Increased competition in the United States as a result of    
the foregoing, and other competitive developments, including entry by Internet  
service providers into the long-distance market, could have an adverse effect   
on the Company's business, financial condition and results of operations. In    
addition, many smaller carriers have emerged, most of which specialize in       
offering international telephone services utilizing dial up access methods,     
some of which have begun to build networks similar to the TIGN. See "The        
Global Telecommunications Industry."                                            

The long distance telecommunications industry is intensely competitive and  
is significantly influenced by the pricing and marketing decisions of the       
larger industry participants. In the United States, the industry has            
relatively limited barriers to entry with numerous entities competing for the   
same customers. Customers frequently change long distance providers in          
response to the offering of lower rates or promotional incentives by            
competitors. Generally, the Company's domestic customers can switch carriers    
at any time. The Company believes that competition in all of its markets is     
likely to increase and that competition in non-United States markets is likely  
to become more similar to competition in the United States market over time as  
such non-United States markets continue to experience deregulatory influences.  
In each of the countries where the Company markets its services, the Company    
competes primarily on the basis of price (particularly with respect to its      
sales to other carriers), and also on the basis of customer service and its     
ability to provide a variety of telecommunications products and services.       
There can be no assurance that the Company will be able to compete              
successfully in the future. The Company anticipates that deregulation and       
increased competition will result in decreasing customer prices for             
telecommunications services. The Company believes that the effects of such      
decreases will be at least partially offset by increased telecommunications     
usage and decreased costs as the percentage of its traffic transmitted over     
the TIGN increases. There can be no assurance that this will be the case. To    
the extent this is not the case, there could be an adverse effect on the        
Company's margins and financial profits, and the Company's business, financial  
condition and results of operations could be materially and adversely           
effected.                                                                       

The telecommunications industry is in a period of rapid technological       
evolution, marked by the introduction of new product and service offerings and  
increasing satellite transmission capacity for services similar to those        
provided by the Company. Such technologies include satellite-based systems,     
such as the proposed Iridium and GlobalStar systems, 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 to         
maintain its competitive position or what expenditures will be required to      
develop and provide such products and services.                                 

GOVERNMENT REGULATION                                                           

Overview. The Company's provision of international and national long        
distance telecommunications services is heavily regulated. Many of the          
countries in which the Company provides, or intends to provide, services        
prohibit or limit the services which the Company can provide, or will be able   
to provide and the transmission methods by which it can provide such services.  
For example, in the United States, the Company plans to engage in the resale    
of international private lines for the provision of switched communications     
services pursuant to an authorization ("Section 214 Private Line                
Authorization") under Section 214 of the Communications Act. Certain rules of   
the FCC currently prohibit the Company from (i) transmitting calls routed over  
the Company's leased line between the United States and the United Kingdom      
onward over international leased lines to certain foreign locations or (ii)     
transmitting calls from certain European countries over international leased    
lines and then onward over its leased line between the United States and the    
United Kingdom. If a violation of FCC rules concerning resale of international  
private line service were found to exist,                                       

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the FCC could impose sanctions and penalties, including revocation of the       
Section 214 Private Line Authorization. FCC restrictions thus materially limit  
the optimal and most profitable use of the Company's leased line between the    
United States and the United Kingdom.                                           

In addition, the Company provides a substantial portion of its customers    
with access to its services through the use of call-reorigination. Revenues     
attributable to call-reorigination represented 76.6% of the Company's revenues  
in fiscal year 1996 and 75.5% of the Company's revenues for the nine months     
ended September 30, 1997, and are expected to continue to represent a           
significant but decreasing portion of the Company's revenues. A substantial     
number of countries have prohibited certain forms of call-reorigination as a    
mechanism to access telecommunications services. This has caused the Company    
to cease providing call-reorigination services to customers in Bermuda, the     
Bahamas, the Philippines, and the Cayman Islands, and may require it to do so   
with respect to customers in other jurisdictions in the future. As of November  
20, 1997, reports had been filed with the ITU and/or the FCC claiming that the  
laws in 79 countries prohibit call-reorigination. While the Company provides    
call-reorigination services in substantially all of these countries, no single  
country within this group accounts for more than [2%] of the total revenues of  
the Company for the nine months ended September 30, 1997. There can be no       
assurance that other countries where the Company derives material revenue will  
not prohibit call-reorigination in the future. To the extent that a country     
with an express prohibition against the provision of call-reorigination using   
uncompleted call signaling is unable to enforce its laws against a provider of  
such services, it can request that the FCC enforce such laws in the United      
States by, for example, requiring a provider of such services to cease          
providing call-reorigination services using uncompleted call signaling to such  
country or by revoking such provider's FCC authorizations. Twenty-nine          
countries have formally notified the FCC that call-reorigination services       
violate their laws. The Company provides call-reorigination in 28 of these      
countries, which accounted for 7.9% of the Company's total revenues for the     
nine months ended September 30, 1997. Two of the 29 countries have requested    
assistance from the FCC in enforcing their prohibition on call-reorigination.   
Neither of these two countries accounted for more than 2% of the Company's      
consolidated revenues for the nine months ended September 30, 1997. The FCC     
has held that it would consider enforcement action against companies based in   
the United States engaged in call-reorigination by means of uncompleted call    
signaling to customers in countries where this activity is expressly            
prohibited. The FCC recently ordered several U.S. carriers to cease providing   
call-reorigination services using uncompleted call signalling to customers in   
the Philippines and allowed the complaining party to seek damages. The FCC has  
been asked to reconsider its decision. There can be no assurance that the FCC   
will not take additional action to limit the provision of call-reorganization   
services. Enforcement action could include an order to cease providing call-    
reorigination services in such country, the imposition of one or more           
restrictions on the Company, monetary fines or, in extreme circumstances, the   
revocation of the Company's Section 214 Switched Voice Authorization, and       
could have a material adverse effect on the Company's business, financial       
condition and results of operations. See "Risk Factors--Substantial Government  
Regulation--United States."                                                     

Local laws and regulations differ significantly among the jurisdictions in  
which the Company operates, and, within such jurisdictions, the interpretation  
and enforcement of such laws and regulations can be unpredictable. For          
example, EU member states have inconsistently and, in some instances,           
unclearly implemented the Full Competition Directive under which the Company    
provides certain voice services in Western Europe. As a result, some EU member  
states may limit, constrain or otherwise adversely affect the Company's         
ability to provide certain services. There can be no assurance that certain EU  
member states will implement, or will implement consistently, the Full          
Competition Directive, and either the failure to implement or inconsistent      
implementation of such directives could have a material adverse effect on the   
Company's business, financial condition and results of operations.              

Additionally, there can be no assurance that future United States or foreign
regulatory, judicial or legislative changes will not have a material adverse    
effect on the Company or that regulators or third parties will not raise        
material issues with regard to the Company's compliance with applicable laws    
or regulations. If the Company is unable to provide the services it is          
presently providing or intends to provide or to use its existing or             
contemplated transmission methods due to its inability to receive or retain     
formal or informal approvals for such services or                               

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transmission methods, or for any other reason related to regulatory compliance  
or the lack thereof, such events could have a material adverse effect on the    
Company's business, financial condition and results of operations. See "Risk    
Factors--Substantial Government Regulation."                                    

The Company has pursued and expects to continue to pursue a strategy of     
providing its services to the maximum extent it believes, upon consultation     
with counsel, to be permissible under applicable laws and regulations. To the   
extent that the interpretation or enforcement of applicable laws and            
regulations is uncertain or unclear, the Company's strategy may result in the   
Company's (i) providing services or using transmission methods that are found   
to violate local laws or regulations or (ii) failing to obtain approvals or     
make filings subsequently found to be required under such laws or regulations.  
Where the Company is found to be or otherwise discovers that it is in           
violation of local laws and regulations and believes that it is subject to      
enforcement actions by the FCC or the local authority, it typically seeks to    
modify its operations or discontinue operation so as to comply with such laws   
and regulations. There can be no assurance, however, that the Company will not  
be subject to fines, penalties or other sanctions as a result of violations     
regardless of whether such violations are corrected. If the Company's           
interpretation of applicable laws and regulations proves incorrect, it could    
lose, or be unable to obtain, regulatory approvals necessary to provide         
certain of its services or to use certain of its transmission methods. The      
Company also could have substantial monetary fines and penalties imposed        
against it.                                                                     

A summary discussion of the regulatory frameworks in certain geographic     
regions in which the Company operates or has targeted for penetration is set    
forth below. This discussion is intended to provide a general outline of the    
more relevant regulations and current regulatory posture of the various         
jurisdictions and is not intended as a comprehensive discussion of such         
regulations or regulatory posture.                                              

United States. The Company's provision of international service to, from,   
and through the United States is subject to regulation by the FCC. Section 214  
of the Communications Act requires a company to make application to, and        
receive authorization from, the FCC to, among other things, resell              
telecommunications services of other U.S. carriers with regard to               
international calls. In May 1994, the FCC authorized the Company, pursuant to   
the Section 214 Switched Voice Authorization, to resell public switched         
telecommunications services of other U.S. carriers. The Section 214 Switched    
Voice Authorization requires, among other things, that services be provided in  
a manner that is consistent with the laws of countries in which the Company     
operates. As described above, the Company's aggressive regulatory strategy      
could result in the Company's providing services that ultimately may be         
considered to be provided in a manner that is inconsistent with local law. If   
the FCC finds that the Company has violated the terms of the Section 214        
Switched Voice Authorization, it could impose a variety of sanctions on the     
Company, including fines, additional conditions on the Section 214 Switched     
Voice Authorization, cease and desist or show cause orders, or the revocation   
of the Section 214 Switched Voice Authorization, the latter of which is         
usually imposed only in the case of serious violations. Depending upon the      
sanction imposed, such sanction could have a material adverse effect on the     
Company's business, financial condition and results of operations. See "Risk    
Factors--Substantial Government Regulation."                                    

In order to conduct a portion of its business involving the origination and 
termination of calls in the United States, the Company uses leased lines. The   
Company's Section 214 Private Line Authorization permits the Company to resell  
international private lines interconnected to the PSTNs in the United States    
and the United Kingdom, for the purpose of providing switched                   
telecommunications services. However, the FCC imposes certain restrictions      
upon the use of the Company's private line between the United States and the    
United Kingdom. The Company may route over the private line switched traffic    
originating in the United States or in the United Kingdom and terminating in    
the United States or the United Kingdom. The Company may also route over the    
private line switched traffic originating in the United States or the United    
Kingdom and sent to third countries via the switched services of a carrier in   
the United States or the United Kingdom by taking such services at published    
rates. Similarly, the Company may route over the private line calls that        
originate in a third country over an ITO's tariffed switched services and       
terminate in the United States or the United Kingdom. The Company may not       
route traffic to or from the United States over the private line between the    
United States and the United Kingdom if such traffic originates or terminates   
in a third country over a private line between the                              

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United Kingdom and such third country, if the third country has not been found  
by the FCC to offer "equivalent" resale opportunities. The Company is           
currently not routing U.S.-originated traffic to or U.S. terminated traffic     
from non-"equivalent" countries via private lines. To date, the FCC has found   
that only Canada, the United Kingdom, Sweden, New Zealand and Australia offer   
such opportunities. Recently, the FCC held that carriers will be permitted to   
route switched traffic over private lines between the United States and any     
country that is a member of the WTO and also where the local ITO generally      
charges U.S. carriers at or below an FCC-determined rate for terminating the    
U.S. carriers' traffic. The FCC also held that carriers may route over private  
lines between such countries switched traffic originating in the United States  
and sent to third countries via the switched services of a carrier in these     
countries by taking such services at published rates. Similarly, the Company    
may route over the private lines traffic that originates in a third country     
over an ITO's switched services and terminate in the United States. The         
Company believes that, when the FCC's decision becomes effective, the Company   
will also be permitted to route switched traffic over international private     
lines initially between the United States and Denmark, Germany, France,         
Luxembourg, the Netherlands, and Norway. Following implementation of the Full   
Competition Directive by EU member states, the FCC may authorize the Company    
to originate and terminate traffic over its private line between the United     
States and such carriers and over an additional private line pursuant to ISR    
authority to additional member states. However, there can be no assurance that  
the FCC will take such action.                                                  

The Company also owns capacity in international facilities to provide some  
services, and may in the future acquire additional interests in international   
facilities. The Company has a Section 214 facilities authorization to provide   
services over international facilities between the United States and all        
countries other than Cuba. The Company is also required to conduct its          
facilities-based international business in compliance with the FCC's ISP. The   
ISP establishes the permissible arrangements for U.S. based facilities-based    
carriers and their foreign counterparts to settle the cost of terminating each  
other's traffic over their respective networks. One of the Company's            
arrangements with foreign carriers is subject to the ISP and it is possible     
that the FCC could take the view that this arrangement does not comply with     
the existing ISP rules. See "The Global Telecommunications Industry--           
International Switched Long Distance Services--Operating Agreements." If the    
FCC, on its own motion or in response to a challenge filed by a third party,    
determines that the Company's foreign carrier arrangements do not comply with   
FCC rules, among other measures, it may issue a cease and desist order, impose  
fines on the Company or revoke or suspend its FCC authorizations. See "Risk     
Factors--Recent and Potential FCC Actions." Such action could have a material   
adverse effect on the Company's business, financial condition and results of    
operations.                                                                     

The Company is required to file and has filed with the FCC a tariff         
containing the rates, terms and conditions applicable to its international      
telecommunications services. The Company is also required to file with the FCC  
any agreements with customers containing rates, terms, and conditions for       
international telecommunications services, if those rates, terms, or            
conditions are different than those contained in the Company's tariff.          
Notwithstanding the foregoing requirements, to date, the Company has not filed  
with the FCC certain commercially sensitive carrier-to-carrier customer         
contracts. If the Company charges rates other than those set forth in, or       
otherwise violates, its tariff or a customer agreement filed with the FCC, or   
fails to file with the FCC carrier-to-carrier agreements, the FCC or a third    
party could bring an action against the Company, which could result in a fine,  
a judgment or other penalties against the Company. Such action could have a     
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

The Company's provision of domestic long distance service in the United     
States is subject to regulation by the FCC and relevant state PSCs, which       
regulate interstate and intrastate rates, respectively, ownership of            
transmission facilities, and the terms and conditions under which the           
Company's domestic services are provided. In general, neither the FCC nor the   
relevant state PSCs exercise direct oversight over cost justification for the   
Company's services or the Company's profit levels, but either or both may do    
so in the future. The Company, however, is required by federal and state law    
and regulations to file tariffs listing the rates, terms and conditions of      
services provided. The Company has filed domestic long distance tariffs with    
the FCC. The October 29, 1996 Order eliminated the requirement that non-        
dominant interstate carriers, such as the Company, maintain FCC                 

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tariffs. However, on February 13, 1997, the DC Circuit ruled that the FCC's     
order will be stayed pending judicial review of the appeals. Should the         
appeals fail and the FCC's order become effective, the Company may benefit      
from the elimination of FCC tariffs by gaining more flexibility and speed in    
dealing with marketplace changes. However, the absence of tariffs will also     
require that the Company secure contractual agreements with its customers       
regarding many of the terms of its existing tariffs or face possible claims     
arising because the rights of the parties are no longer clearly defined. The    
Company generally is also required to obtain certification from the relevant    
state PSC prior to the initiation of intrastate service. Telegroup has the      
authorizations required or is not required to obtain authorization to provide   
service in 47 states, and has filed or is in the process of filing required     
tariffs in each state that requires such tariffs to be filed. The Company has   
complied or is in the process of complying with certain reporting requirements  
imposed by state PSCs in each state in which it conducts business. Any failure  
to maintain proper federal and state tariffing or certification or to file      
required reports or otherwise to comply with FCC or state requirements could    
have a material adverse effect on the Company's business, financial condition   
and results of operations. The FCC also imposes some requirements for           
marketing of telephone services and for obtaining customer authorization for    
changes in the customer's primary long distance carrier.                        

To originate and terminate calls in connection with providing their         
services, long distance carriers such as the Company must purchase "access      
services" from LECs or CLECs. Access charges represent a significant portion    
of the Company's cost of U.S. domestic long distance services and, generally,   
such access charges are regulated by the FCC for interstate services and by     
PSCs for intrastate services. The FCC has undertaken a comprehensive review of  
its regulation of LEC access charges to better account for increasing levels    
of local competition. On May 16, 1997, the FCC released an order making         
significant changes in the access service rate structure. Some of the changes   
may result in increased costs to the Company for the "transport" component of   
access services, although other revisions of the order likely will reduce       
other access costs. Some issues in the FCC proceeding have not yet been         
resolved, including a proposal under which LECs would be permitted to allow     
volume discounts in the pricing of access charges. While the outcome of these   
proceedings is uncertain, if these rate structures are adopted many long        
distance carriers, including the Company, could be placed at a significant      
cost disadvantage to larger competitors. In addition, the FCC has recently      
announced actions to implement the 1996 Telecommunications Act that will        
impose new regulatory requirements including the requirement that all           
telecommunications service providers, including the Company, contribute some    
portion of their telecommunications revenues to a "universal service fund"      
designated to fund affordable telephone service for consumers, schools,         
libraries and rural health care providers. These contributions will become      
payable beginning in 1998 for all interexchange carriers. Although the FCC has  
not determined the precise amount of the contribution, the Company estimates    
at this time that it will constitute approximately 4% of its gross revenues     
from domestic end-user customers.                                               

In some instances, the Company may be responsible for city sales taxes on   
calls made within the jurisdiction of certain U.S. cities. The Company is       
implementing software to track and bill for this tax liability. However, the    
Company may be subject to sales tax liability for calls transmitted prior to    
the implementation of such tax software and not be able to collect              
reimbursement for such liability from its customers. While the Company          
believes that any such liability will not be significant, there can be no       
assurance that such tax liability, if any, will not have a material adverse     
effect on the Company's business, financial condition or results of             
operations.                                                                     

In November 1996, the FCC adopted rules that would require that             
interexchange companies offering toll-free access through payphones compensate  
certain payphone operators for customers' use of the payphone. On July 1, 1997  
the United States Court of Appeals for the District of Columbia Circuit issued  
an opinion reversing in part the FCC's payphone orders. The Court ruled that    
the rate of $.35 per call was arbitrary and capricious and remanded the case    
to the FCC for further proceedings. The FCC issued a Second Report and Order    
on October 9, 1997, holding that interexchange carriers must compensate         
payphone owners at a rate of $.284 per call for all calls using their           
payphones. This compensation method will be effective from October 7, 1997      
through October 7, 1999. After this time period, interexchange carriers will    
be required to compensate payphone owners at a market-based rate minus $0.066   
per call. A number of carriers have appealed the Second Report and Order        

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to the U.S. Court of Appeals for the D.C. Circuit or have sought FCC            
reconsideration of this order. Although the Company cannot predict the outcome  
of the FCC's proceedings on the Company's business, it is possible that such    
proceedings could have a material adverse effect on the Company's business,     
financial condition and results of operations.                                  

The FCC and certain state agencies also impose prior approval requirements  
on transfers of control, including pro forma transfers of control and           
corporate reorganizations, and assignments of regulatory authorizations. Such   
requirements may delay, prevent or deter a change in control of the Company.    

Europe. In Europe, the regulation of the telecommunications industry is     
governed at a supra-national level by the EU (consisting of the following       
member states: Austria, Belgium, Denmark, Finland, France, Germany, Greece,     
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the    
United Kingdom), which is responsible for creating pan-European policies and,   
through legislation, has developed a regulatory framework to ensure an open,    
competitive telecommunications market. The EU was established by the Treaty of  
Rome and subsequent conventions and is authorized by such treaties to issue     
"directives." EU member states are required to implement these directives       
through national legislation. If an EU member state fails to adopt such         
directives, the European Commission may take action, including referral to the  
European Court of Justice, to enforce the directives.                           

In 1990, the EU issued the Services Directive requiring each EU member state
to abolish existing monopolies in telecommunications services, with the         
exception of Voice Telephony. The intended effect of the Services Directive     
was to permit the competitive provision of all services other than Voice        
Telephony, including value-added services and voice services to CUGs. However,  
as a consequence of local implementation of the Services Directive through the  
adoption of national legislation, there are differing interpretations of the    
definition of prohibited Voice Telephony and permitted value-added and CUG      
services. Voice services accessed by customers through leased lines are         
permissible in all EU member states. The European Commission has generally      
taken a narrow view of the services classified as Voice Telephony, declaring    
that voice services may not be reserved to the ITOs if (i) dedicated customer   
access is used to provide the service, (ii) the service confers new value-      
added benefits on users (such as alternative billing methods) or (iii) calling  
is limited by a service provider to a group having legal, economic or           
professional ties.                                                              

In March 1996, the EU adopted the Full Competition Directive containing two 
provisions which required EU member states to allow the creation of             
alternative telecommunications infrastructures by July 1, 1996, and which       
reaffirmed the obligation of EU member states to abolish the ITOs' monopolies   
in Voice Telephony by 1998. The Full Competition Directive encouraged EU        
member states to accelerate liberalization of Voice Telephony. To date,         
Sweden, Finland, Denmark, the Netherlands and the United Kingdom have           
liberalized facilities-based services to all routes. Certain EU countries may   
delay the abolition of the Voice Telephony monopoly based on exemptions         
established in the Full Competition Directive. These countries include Spain    
(1998), Portugal (2000), Ireland (January 1, 2000), Luxembourg (July 1, 1998)   
and Greece (2000).                                                              

Each EU member state in which the Company currently conducts its business   
has a different regulatory regime and such differences are expected to          
continue beyond January 1998. The requirements for the Company to obtain        
necessary approvals vary considerably from country to country and are likely    
to change as competition is permitted in new service sectors. Except with       
respect to Voice Telephony and call-reorigination, the Company believes that,   
to the extent required, it has filed or will file applications, received        
comfort letters or obtained licenses from the applicable regulatory             
authorities.                                                                    

The Company may be incorrect in its assumptions that (i) each EU member     
state will abolish, on a timely basis, the respective ITO's monopoly to         
provide Voice Telephony within and between member states and other countries,   
as required by the Services Directive and the Full Competition Directive, (ii)  
deregulation will continue to occur and (iii) the Company will be allowed to    
continue to provide and to expand its services in the EU member countries. The  
European Commission has announced plans to initiate legal action against        
Belgium, Denmark, Germany, Greece, Italy, Luxembourg and Portugal for not       
implementing the Full Competition                                               

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Directive adequately. If the European Commission is not satisfied with the      
explanation given by these countries for their delay it may take action that    
ultimately could result in a decision by the European Court of Justice          
concerning whether these countries have violated the Full Competition           
Directive. The Company's provision of services in Western Europe may also be    
affected if any EU member state imposes greater restrictions on non-EU          
international service than on such service within the EU. There can be no       
assurance that EU member states will not adopt laws or regulatory requirements  
that will adversely affect the Company.                                         

United Kingdom. The Company owns and operates a switching facility in London
that is connected to the UK international gateway by private line circuits      
leased by the Company from third parties. In the United Kingdom, the Company    
offers direct access and call-reorigination, as well as customized calling      
card and prepaid debit calling card services, and provides international call   
termination services to other telecommunications carriers and resellers on a    
wholesale switched minute basis. The Company's services are subject to the      
Telecommunications Act of 1984 (the "UK Telecommunications Act"). The           
Secretary of State for Trade and Industry (the "TI Secretary") is responsible   
for granting telecommunications licenses and the Director General of            
Telecommunications ("DGT") and his staff, known as the Office of                
Telecommunications ("Oftel"), the United Kingdom's telecommunications           
regulatory authority, are responsible for enforcing the conditions of such      
licenses. On May 6, 1997, the TI Secretary granted the Company an ISR license,  
which allows the Company to offer certain international and national long       
distance services utilizing international private leased circuits. The TI       
Secretary is considering replacing the ISR license with a new license           
applicable to a narrower scope of activities. The Company may have to apply     
for a new license if the TI Secretary replaces the ISR license and if the       
Company's activities fall within the scope of activities covered by the new     
license. The loss of the Company's license or the placement of significant      
restrictions thereon could have a material adverse effect on the Company's      
business, financial condition and results of operations. See "Risk Factors--    
Substantial Government Regulation."                                             

To reduce transmission costs associated with leasing IPLCs owned by third   
parties and to provide additional capacity between the United States and        
United Kingdom, the Company has the option to acquire capacity on an IRU basis  
in a digital undersea fiber-optic cable for the transmission of traffic         
between its London switching facility and its international gateway switching   
center in New York. Before providing service over this capacity, the Company    
is required to apply to the TI Secretary to obtain an International Facilities  
License ("IF License") that would permit it to run international voice          
services over submarine cables in which it has an IRU interest. The British     
government has not placed any limit on the number of IF Licenses it will        
issue, but there can be no assurance that the Company will be granted an IF     
License. The Company's failure to obtain an IF License would prevent the        
Company from providing facilities-based services to and from the United         
Kingdom through its own facilities (e.g., by IRU), would adversely affect the   
Company's plans and ability to expand its operations, and could have a          
material adverse effect on the Company's business, financial condition and      
results of operations.                                                          

The Netherlands. The regulation of telecommunications is currently          
controlled by the Onafhankelijke post-en telecommunicatie autoriteit ("OPTA"),  
an independent administrative authority. The Company presently owns and         
operates a switching facility in Amsterdam, which the Company intends in the    
future to connect by leased lines to its international gateway switching        
center in New York, subject to Dutch and FCC rules. To keep pace with           
competitors, the Company presently offers call-through services in the          
Netherlands. In particular, the Company has begun to provide a range of         
enhanced telecommunications services and switched voice services to business    
users, including to CUGs, by routing traffic via the switched networks of a     
competitor of the ITO.                                                          

Germany. The regulation of the telecommunications industry in Germany is    
governed by Telekommunikations-gesetz, the Telecommunications Act of 1996       
("TKG"), which, with respect to most of its provisions, became effective in     
August 1996. Under the TKG, a license ("TKG License") is generally required by  
any person that: (i) operates transmission facilities for the provision of      
telecommunications services to the public; or (ii) offers Voice Telephony       
services to the public through telecommunications networks operated by such     
provider. While the TKG represents the final phase of the reform of the German  
telecommunications industry, the law will continue to protect the monopoly      
rights of Deutsche Telecom over the provision of Voice Telephony until January  
1, 1998.                                                                        

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In Germany, the Company is currently providing calling card services as well
as traditional call-reorigination services (through answered or unanswered      
call signaling), and is migrating CUGs and other customers to call-             
reorigination services provided through Internet/X.25 data link signaling, to   
transparent call-reorigination and/or to forms of call-through other than       
transparent call-reorigination. The Company anticipates providing a range of    
enhanced telecommunications services and switched voice services to business    
users, including to CUGs, by routing traffic via the international switched     
networks of competitors to the ITO. While the Company believes that it will     
not be found to be offering Voice Telephony prior to the expiration of the      
ITO's monopoly on such services, the Company has received no assurance from     
the ITO or from the respective regulatory authorities that this will be the     
case. It is possible that the Company could be fined, or that the Company       
would not be allowed to provide specific services, if the Company were found    
to be providing Voice Telephony before January 1, 1998, or after that date      
without obtaining a proper license, such actions could have a material adverse  
effect on the Company's business, financial condition and results of            
operations.                                                                     

In order to provide the Voice Telephony services to the public that the     
Company intends to provide after January 1, 1998, and expand its network        
switching facilities in Germany, the Company will be required to obtain a TKG   
License. Under the TKG, an applicant is entitled to the grant of a license      
subject to certain public policy considerations set forth in the statute. A     
license may be revoked if, among other things, continued effectiveness would    
be contrary to statutory public policy considerations. There can be no          
assurance that the Company will be able to obtain, or, if granted, thereafter   
maintain, a TKG License. The failure to obtain, or the loss of, a TKG License   
or the placement of significant restrictions thereon could have a material      
adverse effect on the Company's business, financial condition and results of    
operations. In addition, there can be no assurance that any future changes in,  
or additions to, any existing or future German laws, regulations, government    
policy, court or administrative rulings regarding telecommunications will not   
have a material adverse effect on the Company's business, financial condition   
and results of operations. See "Risk Factors--Substantial Government            
Regulation--European Union."                                                    

France. The Company currently provides call-reorigination services,         
including transparent call-reorigination. The Company is permitted to provide   
call-reorigination over the ITO's network in France without a license.          
Although it does not currently provide such services, under current law, the    
Company may lease circuits and provide switched voice services to CUGs in       
France without a license. Until January 1, 1998, the Company may not provide    
Voice Telephony to the public in France. The Company anticipates that it will   
migrate CUGs and other customers to forms of call-through other than call-      
reorigination prior to January 1, 1998. The Company anticipates providing a     
range of enhanced telecommunications services and switched voice services to    
business users, including to CUGs, by routing traffic via the international     
switched networks of competitors to the ITO. While the Company believes that    
it will not be found to be offering Voice Telephony prior to the expiration of  
the ITO's monopoly on such services, the Company has received no assurance      
from the ITO or from the respective regulatory authorities that this will be    
the case. It is possible that the Company could be fined, or that the Company   
would not be allowed to provide certain services, if the Company were found to  
be providing Voice Telephony before January 1, 1998, or after that date         
without obtaining a proper license. Such actions could have a material adverse  
effect on the Company's business, financial condition and results of            
operations.                                                                     

A new telecommunications law, passed in 1996 to implement the Full          
Competition Directive, establishes a licensing regime and an independent        
regulator and imposes various interconnection and other requirements designed   
to facilitate competition. Depending on the establishment of rules to           
implement this new law, the Company expects to be in a position to expand its   
services to include, for example, all forms of call-through services in France  
which the Company expects to provide on a facilities-based or on a resale       
basis. After January 1, 1998, if it decides to provide switched voice services  
to the public, including call-through services, or to own facilities, the       
Company will have to apply for a license from the Minister of                   
Telecommunications. There can be no guarantee, however, that the Company will   
be able to obtain necessary licenses, permits, or interconnection arrangements  
to fully take advantage of such liberalization. The lack of timely              
liberalization or the Company's inability to take advantage of such             
liberalization could have a material adverse impact on the Company's ability    
to expand its services as planned.                                              

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Switzerland. In Switzerland, the Company is currently providing call-       
reorigination services, but anticipates that it will migrate CUGs and other     
customers to forms of call-through other than call-reorigination prior to       
January 1, 1998, the date on which full competition with the ITO will be        
permitted. The Company anticipates providing a range of enhanced                
telecommunications services and switched voice services to business users,      
including to CUGs, by routing traffic via the international switched networks   
of competitors to the ITO. While the Company believes that it will not be       
found to be offering Voice Telephony prior to the expiration of the ITO's       
monopoly on such services, the Company has received no assurance from the ITO   
or from the respective regulatory authorities that this will be the case. It    
is possible that the Company could be fined, or that the Company would not be   
allowed to provide specific services, if the Company were found to be           
providing Voice Telephony before January 1, 1998, or after that date without    
obtaining a proper license, such actions could have a material adverse effect   
on the Company's business, financial condition and results of operations. The   
Company's existing services are subject to the Federal Law on                   
Telecommunications of June 21, 1991 ("LTC"). Although Switzerland is not an EU  
member state, the Swiss government has expressed its intention to maintain      
Swiss telecommunications regulations in line with EU directed liberalization.   
Towards that end, on October 1, 1996, the Swiss federal government published a  
draft law designed to increase competition in the telecommunications industry   
and to guarantee "universal" services for the entire Swiss population at        
reasonable prices. This draft law was approved by the Swiss Parliament on       
April 30, 1997 ("New LTC"). Upon deregulation of the Swiss telecommunications   
market and subject to FCC rules, the Company plans to expand operations in      
Switzerland through the installation of additional switching facilities in      
Zurich and other metropolitan areas of Switzerland connected via international  
private leased circuits ("IPLCs") to its international gateway switching        
center to provide international and national long distance services with        
switched and dedicated access. Under the New LTC, the Company would not be      
required to obtain a license unless it controls the infrastructure over which   
its services are carried. The new Federal decree adopted by the Swiss           
government on October 6, 1997 confirms this regulation; nevertheless, the       
government has indicated that a telecommunication provider using switchboard    
facilities may be required to obtain a license if the turnover achieved in      
Switzerland is more than CHF 10 million. Accordingly, the Company's provision   
of its existing or increased services may require the Company to obtain such a  
license. Furthermore, there can be no guarantee that the Company will be able   
to obtain any necessary license. See "Risk Factors--Substantial Government      
Regulation."                                                                    

Pacific Rim. Regulation of the Company varies in the Pacific Rim, depending 
upon the particular country involved. The Company's ability to provide voice    
telephony services is restricted in all countries where the Company provides    
service except Australia and New Zealand, although service between Australia    
or New Zealand and other countries may be constrained by restrictions in the    
other countries. In Australia and New Zealand, regulation of the Company's      
provision of telecommunications services is relatively permissive, although     
enrollment (in Australia) or registration (in New Zealand) with the regulator   
is required for ISR. The Company's Australian Subsidiary was enrolled in        
Australia as a Supplier of Eligible International Services under the            
Telecommunications Act 1991 (and now has the right to provide equivalent        
services under the Telecommunications Act 1997) and its Subsidiary in New       
Zealand has registered with the Ministry of Commerce as an International        
Service Operator under the Telecommunications International Services            
Regulations of 1995. Additionally, in Japan, the Company provides call-         
reorigination services but may not provide basic switched voice services to     
the public. The Company may, with a license, provide a broad array of value-    
added services, as well as limited switched voice services to CUGs. The         
Japanese government has indicated that it will permit carriers such as the      
Company to apply for ISR authority some time in 1997. In Hong Kong, the         
Company may provide call-reorigination under its existing license. A range of   
international telephone services, including the operation of an international   
gateway for all incoming and outgoing international calls, is provided in Hong  
Kong solely by HKTI, the ITO, pursuant to an exclusive license which will       
expire on October 1, 2006. However, the Hong Kong government has entered into   
discussions with HKTI concerning a possible early termination of its exclusive  
license. In all other Pacific Rim countries, the Company is strictly limited    
in its provision of public voice and value added services.                      

While some countries in the Pacific Rim oppose call-reorigination, the      
Company generally has not faced significant regulatory impediments. China,      
Indonesia, and the Philippines have specifically informed the FCC               

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that call-reorigination using uncompleted call signaling is illegal in those    
countries. Australia, New Zealand, Japan and Hong Kong permit call-             
reorigination.                                                                  

Australia. In Australia, the provision of the Company's services was subject
to federal regulation pursuant to the Telecommunications Act 1991 of Australia  
(the "1991 Act") until June 30, 1997, and is now subject to federal             
legislation pursuant to the Telecommunications Act 1997 (the "1997 Act") and    
federal regulation of anticompetitive practices pursuant to the Trade           
Practices Act 1974. In addition, other federal legislation, various             
regulations pursuant to delegated authority and legislation, ministerial        
declarations, codes, directions, licenses, statements of Commonwealth           
Government policy and court decisions affecting telecommunications carriers     
also apply to the Company. There can be no assurance that future declarations,  
codes, directions, licenses, regulations, and judicial and legislative changes  
will not have a material adverse effect on the Company's business, financial    
condition and results of operations.                                            

The Australian Telecommunications Authority ("AUSTEL"), Australia's federal 
telecommunications regulatory authority, had control until June 30, 1997 over   
a broad range of issues affecting the operation of the Australian               
telecommunications industry, including the licensing of carriers, the           
promotion of competition, consumer protection and technical matters. Under the  
1997 Act, AUSTEL's authority is now divided between the Australian              
Communications Authority and the Australian Competition and Consumer            
Commission.                                                                     

The Company owns and operates a switch in Sydney that is connected to the   
New York international gateway switch via leased lines. On December 9, 1996,    
the Company's Subsidiary, Telegroup Network Services pty Limited, was enrolled  
as a Supplier of Eligible International Services ("Class License") under        
Section 226 of the 1991 Act, which allowed the Company to resell national,      
local and long distance service, cellular service, and international service,   
including to engage an ISR. Under the 1991 Act, the Company's Australian        
Subsidiary was required to comply with the conditions of the Class License      
until the 1997 Act came into effect on July 1, 1997. Under the 1997 Act, the    
Company's Subsidiary is subject to certain service provider rules, including    
an obligation to provide certain operator services, directory assistance        
services and itemized billing for customers of the Subsidiary. It is currently  
expected that the Australian Government will allow additional carriers,         
including the Company, to own transmission facilities in July 1997. The         
Company is a carriage service provider under the 1997 Act, which entitles the   
Company to purchase IRUs for the Australian portion of the underseas fiber-     
optic cable between Sydney and New York, as well as Auckland, New Zealand. The  
Company will be required to comply with the rules applicable to carriage        
service providers. If the Company or its affiliate purchases or constructs a    
link between places in Australia (e.g., to provide an extension to its          
international services), it will be required to apply for a carrier license.    
It would then be subject to the terms of its own license and would be subject   
to greater regulatory controls such as in areas of regulation of connectivity,  
provision of access to service providers, land access and contributions to the  
net cost of universal service throughout Australia (to provide                  
telecommunications services at reasonable prices to remote sections of that     
country) applicable to licensed facilities-based carriers.                      

Although Australia is recognized by the FCC as an "equivalent" country, the 
Company is not authorized by the FCC to use the Australian ISR license between  
the U.S. and Australia, as is allowed in the United Kingdom, because the ITO    
does not currently charge U.S. carriers at or below an FCC-determined rate for  
terminating U.S. carrier's traffic. The Company anticipates receiving this      
authorization in February 1998. The FCC has granted the Company's request for   
a waiver allowing the Company to deviate from the existing FCC approved $0.22   
per minute settlement rate and to contract at $0.05 per minute using leased     
lines, pursuant to an agreement with its Subsidiary in Australia. The Company   
has initiated service pursuant to this agreement.                               

There can be no assurance that a change in government policy in relation to 
telecommunications or competition, or in the enforcement of the 1997 Act, will  
not have a material adverse effect on the Company's business, financial         
condition and results of operations. For example, there can be no assurance     
that the deregulatory process will proceed in accordance with the government's  
announced timetable. Any delay in such                                          

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deregulatory process or in the granting of licenses to other entities           
interested in developing their own transmission facilities in Australia could   
delay potential price reductions anticipated in a more competitive              
marketplace, thereby delaying the Company's access to potentially less          
expensive transmission and access facilities.                                   

Hong Kong. The Company acts as a wholesale carrier in Hong Kong, utilizing  
its switch colocated at the business premises of one or more of the local       
carriers licensed at Fixed Telecommunications Network Service ("FTNS")          
operators in Hong Kong to provide international services to such FTNS           
providers. The Company carries a substantial amount of such FTNS operators'     
international traffic on a transparent call-reorigination basis. The Company    
operates under a PNETS license granted in 1995 and renewable on an annual       
basis. The Company's PNETS license was most recently renewed in March 1997.     
The Company's PNETS license will likely be renewed unless there has been a      
material breach of one of the license conditions.                               

The telecommunications market in Hong Kong for the provision of public      
telephone services can be categorized into two primary areas: international     
long distance services and local telephone services. HKTI currently holds an    
exclusive license until September 30, 2006 to provide a variety of              
international services including the right to operate an international gateway  
for the handling of all outgoing and incoming international calls. However,     
there have been reports in the Hong Kong press in recent months of talks        
between the Hong Kong Government and HKTI over the possibility of HKTI          
relinquishing its monopoly on a range of international telecommunications       
services (including public international long distance calls) by terminating    
its existing exclusive license, as early as 1999, which is not due to expire    
until October 1, 2006.                                                          

Prior to June 1995, the Hong Kong Telephone Company Limited was the sole    
operator of local fixed network telephone services. Subsequently, the market    
was liberalized and the Hong Kong government granted licenses to Hutchison,     
New World and New T&T Hong Kong Limited to provide fixed local telephone        
network services. Each of the four fixed local telephone network operators      
each currently hold a FTNS license issued by the Hong Kong government. The      
Company plans to apply for a FTNS license if and when the Hong Kong government  
decides to grant additional FTNS licenses, which, the Hong Kong government has  
indicated, will be no earlier than 1998. Despite the fact that HKTI has the     
exclusive right under its license to provide international telephone services,  
all three of the other local fixed network operators have in recent years       
gained a significant share of the international long distance call market       
(approximately 30% to 40% according to the Company's estimates) by utilizing    
U.S. and Canada-based call-reorigination services. See "Risk Factors--          
Substantial Government Regulation" and "The Global Telecommunications           
Industry--Competitive Opportunities and Advances in Technology."                

There can be no assurance that China will continue the existing licensing   
regime with respect to the Hong Kong telecommunications industry. There is      
also no assurance that China will continue to implement the existing policies   
of the Hong Kong government with respect to promoting the liberalization of     
the Hong Kong telecommunications industry in general, including the policy      
allowing call-reorigination, which is currently prohibited in China. For the    
nine months ended September 30, 1997, one wholesale customer in Hong Kong       
accounted for approximately 12% of the Company's total revenues. Substantially  
all of the services provided by the Company to this customer consist of call-   
reorigination services. The initial term of the Company's agreement with the    
Hong Kong Customer expires in October 1998, automatically renews for one-year   
periods, and may be terminated by the Hong Kong Customer if it determines in    
good faith that the services provided pursuant to the agreement are no longer   
commercially viable in Hong Kong. If the Company loses its rights under its     
PNETS license and/or if it is unable to provide international                   
telecommunications services in Hong Kong on a wholesale basis, such action      
could have a material adverse effect on the Company's business, financial       
condition and results of operations. In addition, a material reduction in the   
level of services provided by the Company to the Hong Kong Customer, or a       
termination of the Company's agreement with the Hong Kong Customer, could have  
a material adverse effect on the Company's business, financial condition and    
results of operations.                                                          

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Japan. The Company owns and operates a switch in Tokyo. In Japan, the       
Company offers traditional call-reorigination services, and anticipates         
offering call-through as well as customized calling card and debit calling      
card services. The Company's services in Japan are subject to regulation by     
the Ministry of Post and Telecommunications (the "Japanese Ministry") under     
the Telecommunications Business Law (the "Japanese Law"). The Company has       
filed notice with the Japanese Ministry as a General Type II carrier. The       
Company is in the process of seeking a Special Type II registration which will  
permit the Company to provide additional services in Japan. There can be no     
assurance that the Company will be able to register with the Japanese Ministry  
as a Special Type II carrier. The Company's failure to obtain rights as a       
Special Type II carrier, could have a material adverse effect on the Company's  
ability to expand its operations in Japan and could materially adversely        
effect the Company's business, financial condition and results of operations.   

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EMPLOYEES                                                                       

As of September 30, 1997, the Company had 510 full-time and 66 part-time    
employees. None of the Company's employees are covered by a collective          
bargaining agreement. Management believes that the Company's relationship with  
its employees is satisfactory.                                                  

AGREEMENTS WITH INDEPENDENT AGENTS                                              

Independent Agents. The Company's agreements with its independent agents    
(other than Country Coordinators) typically provide for a two-year term and     
require the agents to offer the Company's services at rates prescribed by the   
Company and to abide by the Company's marketing and sales policies and rules.   
Independent agent compensation is paid directly by the Company and is based     
exclusively upon payment for the Company's services by customers obtained for   
Telegroup by the independent agents. The commission paid to independent agents  
ranges between five to twelve percent of revenues received by the Company and   
varies depending on individual contracts, the exclusivity of the agent and the  
type of service sold. Commissions are paid each month based on payments         
received during the prior month from customers obtained by independent agents.  
Independent agents are held accountable for customer collections and are        
responsible for up to 40% of bad debt attributable to customers they enroll.    
The Company may change commissions on any of its services with 30 days written  
notice to the independent agent.                                                

As of September 30, 1997, approximately [one-third] of the Company's retail 
revenues was derived from customers enrolled by agents who are contractually    
prohibited from offering competitive telecommunications services to their       
customers during the term of their contract and typically for a period of two   
years thereafter. Contracts with independent agents entered into by the         
Company after July 1996 typically provide for such exclusivity. As earlier      
agreements expire, the Company has generally required its independent agents    
to enter into such new agreements. In the past, certain independent agents      
have elected to terminate their relationships with the Company in lieu of       
entering into new independent agent agreements. In the event that independent   
agents transfer a significant number of customers to other service providers    
or that a significant number of agents decline to renew their contracts under   
the new terms and move their customers to another carrier, either of such       
events may have a material adverse effect on the Company's business, financial  
condition and results of operations. The Company's agreements with its          
independent agents typically provide that the agents have no authority to bind  
Telegroup or to enter into any contract on the Company's behalf.                

Country Coordinators. In significant international markets, Telegroup       
appoints Country Coordinators. Country Coordinators are typically self-         
financed, independent agents, with contracts that bind them exclusively to      
Telegroup. Country Coordinators also have additional duties beyond marketing    
Telegroup services, including the responsibility in a country or region to      
coordinate the activities of Telegroup independent agents including training    
and recruitment, customer service and collections. As of November 30, 1997,     
Telegroup had 28 Country Coordinators who were responsible for sales,           
marketing, customer service and collections in 72 countries. Telegroup has      
begun to vertically integrate its operations by opening offices in Germany and  
the U.K. which provide Country Coordinator services and, in August 1996,        
acquired the business operations of its Country Coordinator in France.          

Country Coordinators offer the Company's services at rates prescribed by the
Company, and enforce standards for all advertising, promotional, and customer   
training materials relating to Telegroup's services that are used or            
distributed in the applicable country or region. Country Coordinators review    
all proposed marketing or advertising material submitted to them by the         
independent agents operating in their country or region and ensure such         
agents' compliance with the Company's standards and policies. The Company's     
agreements with its independent Country Coordinators typically have a two-year  
term and include an exclusivity provision restricting the County Coordinator's  
ability to offer competing telecommunication services. Such agreements          
typically entitle the Country Coordinator to an override based on a percentage  
of revenues collected by Telegroup from customers within the Country            
Coordinator's country or region, as well as a commission similar to the         
commission paid to independent agents with respect to customers obtained        
directly by the Country Coordinator.                                            

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The Company's agreements with its Country Coordinators typically provide that   
the agents have no right to enter into any contract on Telegroup's behalf or    
to bind Telegroup in any manner not expressly authorized in writing. See "Risk  
Factors--Dependence on Independent Agents; Concentration of Marketing           
Resources."                                                                     

LEGAL MATTERS                                                                   

The Company makes routine filings and is a party to customary regulatory    
proceedings with the FCC relating to its operations. The Company is not 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 and results of operations.                                            

In June 1996, Macrophone Worldwide (PTY) Ltd. (the "Plaintiff"), a former   
Country Coordinator for South Africa, filed a complaint (the "Complaint")       
against the Company in the United States District Court for the Southern        
District of Iowa (the "Action") alleging, among other things, breach of         
contract, wrongful termination and intentional interference with contractual    
relations. The Complaint requests compensatory and exemplary damages. On        
September 2, 1997, the United States District Court granted summary judgment    
for the Company on all seven tort-based claims. The only remaining claim is a   
contract claim in which there is no pending claim for exemplary damages.        
Although the Company is vigorously defending the Action, management believes    
that the Company will ultimately prevail and does not believe the outcome of    
the Action, if unfavorable, will have a material adverse effect on the          
Company's business, financial condition or results of operations, there can be  
no assurance that this will be the case.                                        

On June 19, 1997, the Company received notice of a threatened lawsuit from  
counsel to Richard DeAngelis, a former Vice President--Sales and Marketing of   
the Company employed from 1993 until May 30, 1997. The notice alleges claims    
for breach of contract, wrongful termination, wrongful discharge and            
defamation. The Company believes that the threatened claims are without merit.  
If an action is filed, the Company intends to vigorously contest any of such    
claims. Although management believes that if an action were filed the Company   
would ultimately prevail and does not believe that the outcome of such action,  
if unfavorable, would have a material adverse effect on the Company's           
business, financial condition or results of operations, there can be no         
assurance that this will be the case. To date, no action has been filed         
against the Company by Mr. DeAngelis.                                           

INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION                               

Intellectual Property. The Company owns U.S. registration number 1,922,458, 
for the mark TELEGROUP GLOBAL ACCESS(R) for international long distance         
telecommunications services, U.S. registration number 2,048,650 for the mark    
TELEGROUP(R), for domestic and international long distance telephone            
telecommunications services and electronic transmission of messages and data,   
a U.S. application for registration of its trademark TELEGROUP(R) INTELLIGENT   
GLOBAL NETWORK SM Number 75-106,214 for domestic and international long         
distance telephone telecommunications services and electronic transmission of   
messages and data, and U.S. application for registration of its Logo, Number    
75-384,655. In addition, the Company owns several foreign applications and      
registrations for the marks TELEGROUP, TELEGROUP TECHNOLOGIES, INTELLIGENT      
GLOBAL NETWORK, TELEGROUP INTELLIGENT GLOBAL NETWORK, SPECTRA, GLOBAL ACCESS,   
TELEGROUP GLOBAL ACCESS, TELECARD, and the TELEGROUP logo. The Company relies   
primarily on common law rights to establish and protect its intellectual        
property, its name, products, and long distance services. There can be no       
assurance that the Company's measures to protect its intellectual property      
will deter or prevent the unauthorized use of the Company's intellectual        
property. If the Company is unable to protect its intellectual property         
rights, including existing trademarks and service marks, it could have a        
material adverse effect upon the Company's business, financial condition and    
results of operations.                                                          

Proprietary Information. To protect rights to its proprietary know-how and  
technology, the Company requires certain of its employees and consultants to    
execute confidentiality and invention agreements that prohibit the disclosure   
of confidential information to anyone outside the Company. These agreements     
also require disclosure and assignment to the Company of discoveries and        
inventions made by such persons while employed                                  

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by the Company. There can be no assurance that these agreements will not be     
breached, that the Company will have adequate remedies for any such breach, or  
that the Company's confidential information will not otherwise become known or  
be independently developed by competitors or others.                            

PROPERTY                                                                        

The Company leases certain office space under operating leases and subleases
that expire at various dates through October 31, 2001, including the Company's  
principal headquarters in Fairfield, Iowa. The principal offices currently      
leased or subleased by the Company are as follows:                              

                                                                [Download Table]

                   LOCATION                     SQUARE FOOTAGE LEASE EXPIRATION
                   --------                     -------------- ----------------
                                                                               
Fairfield, Iowa (Corporate Headquarters)......      31,632      January 2001   
Fairfield, Iowa (Various Offices).............      35,000      Various        
Coralville, Iowa (Network Operations Center)..       7,200      October 2001   
Dusseldorf, Germany (Sales and Customer                                        
 Service Office)..............................       2,100      April 1999     
London, England (Sales and Customer Service                                    
 Office)......................................       1,200      April 2001     
Paris, France (Sales and Customer Service                                      
 Office)......................................       1,600      September 1999 

The Company's switches in New York City, Australia, France, Japan, Hong     
Kong, the Netherlands and the U.K. are located in various facilities pursuant   
to separate colocation agreements. The Company's aggregate rent expense for     
its domestic and international operations, excluding costs relating to          
colocation agreements, was $682,630 in 1996.                                    

The Company recently purchased 65 acres in Fairfield, Iowa, on which it     
intends to build its new corporate headquarters.                                

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MANAGEMENT  

The following table sets forth certain information regarding the Company's  
directors, executive officers and certain other officers as of November 30,     
1997.                                                                           

                                                        [Enlarge/Download Table]

          NAME           AGE                           POSITION                         
          ----           ---                           --------                         
                                                                                        
Fred Gratzon............  51 Chairman of the Board and Director                         
Clifford Rees...........  46 President, Chief Executive Officer and Director            
John P. Lass............  47 Senior Vice President and Chief Operating Officer          
Ronald B. Stakland......  44 Senior Vice President--International Marketing and         
                              Operations and Director                                   
Douglas A. Neish........  42 Vice President--Finance, Chief Financial Officer, Treasurer
                             and Director                                               
Stanley Crowe...........  52 Vice President--North America                              
Michael Lackman.........  46 Vice President--Intelligent Networks                       
Eric E. Stakland........  45 Vice President--Global Carrier Services                    
Ronald L. Jackenthal....  33 Vice President--North American Carrier Sales               
Robert E. Steinberg.....  43 Vice President and General Counsel                         
Ellen Akst Jones........  47 Vice President--Administration                             
Andrew Munro............  37 Vice President--Revenue Systems                            
Steven W. Hathaway......  49 Vice President--Enhanced Services                          
J. Sherman Henderson                                                                    
 III....................  54 Director                                                   
Steven J. Baumgartner...  46 Director                                                   
Rashi Glazer............  49 Director                                                   

Fred Gratzon, a co-founder of the Company, has served as Chairman of the    
Company's Board of Directors and a Director since its formation in 1989. Mr.    
Gratzon founded The Great Midwestern Ice Cream Company in Fairfield, Iowa, in   
1979 and served as its Chairman from 1979 to 1988. Mr. Gratzon received a BA    
in fine arts from Rutgers University in 1968.                                   

Clifford Rees, a co-founder of the Company, has served as President, Chief  
Executive Officer and a Director of the Company since its formation in 1989.    
Prior to co-founding Telegroup, Mr. Rees was a co-founder of Amerex Petroleum   
Corporation, a multinational oil brokerage company. Mr. Rees has been a member  
of the Board of Directors of the Telecommunications Resellers Association       
("TRA") since its inception, and was the founding chairman of the TRA's         
International Resale Council, which advises the TRA Board of Directors on       
issues concerning the expansion of telecommunications resale throughout the     
world. Mr. Rees received a BA, summa cum laude, in biochemistry from Michigan   
State University in 1974.                                                       

John P. Lass has served as Senior Vice President and Chief Operating Officer
of the Company since January 1, 1997. Prior to joining the Company, from        
November 1987 through December 1996, Mr. Lass served as Director and President  
of Capital Management Partners, Inc., an NASD-registered broker-dealer firm.    
During the same period, Mr. Lass was also Director and President of Everest     
Asset Management, Inc., an investment management firm. From 1983 to 1987, Mr.   
Lass served as Investment Manager for the Zimmerman Capital Group and from      
1982 to 1983, Mr. Lass was a consultant with the Boston Consulting Group. Mr.   
Lass received an MBA from Harvard Business School in 1982, where he graduated   
as a Baker Scholar. Mr. Lass received a BA from the University of Washington    
in 1972.                                                                        

Ronald B. Stakland has served as Senior Vice President of International     
Marketing and Operations of the Company since 1992 and as a Director since      
April 1997. Prior to joining the Company, Mr. Stakland was a broker for Prime   
Energy, Inc., an oil brokerage company from January 1988 to August 1992. Mr.    
Stakland received a BFA from the University of Minnesota in 1975.               

Douglas A. Neish has served as Vice President of Finance of the Company     
since November 1995, Treasurer since October 1996 and Chief Financial Officer   
and a Director since April 1997. From 1990 to 1995, Mr. Neish                   

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served as Deputy Treasurer for Canada Mortgage and Housing Corporation and      
from 1988 to 1990 as Vice President of Canada Development Investment            
Corporation ("CDIC"). Prior to his position with CDIC, from 1979 to 1988, Mr.   
Neish was employed by Export Development Corporation where he served in a       
number of positions including Senior Treasury Officer and Manager of            
Marketing. Mr. Neish received a BA from Acadia University, Nova Scotia, Canada  
in 1976 and an MBA from Dalhousie University, Nova Scotia, Canada in 1979.      

Stanley Crowe has served as Vice President of North America of the Company  
since 1993. Prior to joining the Company, Mr. Crowe was a manager for Mall      
Network Services, a telecommunications consulting and management firm from      
1990 to 1993. Prior to his position with Mall Network Services, Mr. Crowe       
served as Vice President of Marketing of Guild Investment Management, a         
national investment management firm, from 1988 to 1990 and President of         
Stanley Crowe & Associates (predecessor to Oakwood Corp.), a real estate        
development and brokerage firm, from 1979 to 1986. Mr. Crowe received a BA      
from the University of California in 1968.                                      

Michael Lackman has served as Vice President of Intelligent Networks of the 
Company since 1994. Mr. Lackman served as Senior Manager at MCI from 1991 to    
1994, where he was responsible for managing global development projects for     
MCI and its alliance partners. From 1988 to 1991, Mr. Lackman was development   
manager for Computer Associates, Inc. From 1980 to 1988, Mr. Lackman was a      
consultant with the Resource Consulting Group. From 1978 to 1980, he served as  
a system administrator with the California Institute of Technology. He          
received his BS in Computer Science from the University of Oregon in 1975.      

Eric E. Stakland has served as Vice President of Global Carrier Services    
since 1995. Prior to joining the Company, Mr. Stakland was Chief Executive      
Officer of Impact Solutions, Inc. (also known as Fiberflex, Inc.), a golf club  
manufacturing and marketing company based in Fairfield, Iowa, from July 1993    
to October 1994. Prior to May 1993, Mr. Stakland was Chief Operating Officer    
of USA Global Link, a telecommunications company. Mr. Stakland received a BSCI  
from Maharishi European Research University in 1983 and an MBA from Maharishi   
University of Management in 1985.                                               

Ronald L. Jackenthal has served as Vice President of North American Carrier 
Sales since May 1997. Prior to joining the Company, Mr. Jackenthal served as    
National Director, Carrier Sales for Cable & Wireless, Inc., the U.S.           
subsidiary of Cable & Wireless, PLC. Beginning in 1987, Mr. Jackenthal held     
various positions at Cable & Wireless, including Manager Carrier Sales from     
1993 to 1995 and National Manager, Major Accounts, from 1990 to 1993. Mr.       
Jackenthal received a B.A. from the University of Florida in 1987.              

Robert E. Steinberg has served as Vice President and General Counsel of the 
Company since June 9, 1997. Prior to joining the Company, Mr. Steinberg served  
from 1988 to May 1997 as Managing Partner of the Washington, D.C. office of     
Porter, Wright, Morris & Arthur (a 250 attorney law firm based in Ohio). Mr.    
Steinberg served from 1983 to 1986 as Special Assistant to U.S. Attorney        
General William French Smith and as Special Litigation Counsel at the U.S.      
Department of Justice. Mr. Steinberg is the author of five books and thirty     
articles on regulatory and litigation topics, including in law journals at      
Yale and Columbia law schools. Mr. Steinberg received a B.A. in 1976 and J.D.   
in 1979 from Washington University.                                             

Ellen Akst Jones has served as the Company's Vice President of              
Administration and Director of Human Resources since August 1997. Prior to      
joining the Company, Ms. Jones ran a private law practice in Fairfield, Iowa    
from 1992 to 1997. Prior to that time, Ms. Jones served as an Associate         
Professor of Law and Government and Dean of Maharishi International University  
College of Natural Law in Washington, DC, an Associate Counsel to the United    
States Senate for the Senate Committee on Human Resources and an Assistant      
General Counsel for the United States Conference of Mayors and Assistant        
Attorney General of Texas. Ms. Jones received a B.A. and a J.D. from the        
University of Pennsylvania in 1970 and 1974, respectively. Ms. Jones is         
admitted to practice in Iowa and before the United States Supreme Court.        

Andrew Munro has served as the Company's Vice President of Revenue Systems  
since September 1997. Prior to joining the Company, Mr. Munro held positions    
with MCI in its Engineering and Information                                     

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Technologies divisions, where he was responsible for architectural              
definitions, design, and implementation of multiple custom billing              
applications. Mr. Munro received a B.S. in Political Science from Charter Oak   
College in 1988.                                                                

Steven W. Hathaway has served as the Company's Vice President of Enhanced   
Services since August 1997 and, previously, as the Company's Director of        
Enhanced Services from September 1994 to July 1997. Prior to joining the        
Company, Mr. Hathaway co-founded and served as Vice President of Marketing for  
Keyboard Advancements. Prior to that time, Mr. Hathaway served as Vice          
President of Sales and Marketing for Laser's Edge and as a Product and          
Marketing Manager for Computer Associates. Mr. Hathaway received a BA from      
Rutgers University in 1971.                                                     

J. Sherman Henderson III has served as a director of the Company since      
October 1997 and has served as President and CEO of UniDial Communications      
from 1993 to the present. Prior to that, Mr. Henderson was employed by US       
Network where he served as a regional telecommunications distributor for        
American Centrex beginning in 1989. Mr. Henderson currently serves as Chairman  
of the Telecommunications Resellers Association's Board of Directors. Mr.       
Henderson has over 35 years of business experience in sales, marketing,         
management and company ownership.                                               

Steven J. Baumgartner has served as a director of the Company since October 
1997 and has served as Executive Vice President and Sector President Global     
Commercial Print for R.R. Donnelley & Sons Company ("R.R. Donnelley") from      
1995 to the present. At R.R. Donnelley Mr. Baumgartner is responsible for all   
printing business outside the United States and is a member of R.R.             
Donnelley's five-person executive committee. Prior to that time, Mr.            
Baumgartner served as Executive Vice President of R.R. Donnelley responsible    
for strategy, communication, technology and human resources from 1993 to 1995.  
Prior to working at R.R. Donnelley, Mr. Baumgartner was co-founder and chief    
executive officer of FRC Management, Inc., a retirement concepts corporation,   
from 1991 to 1993.                                                              

Rashi Glazer has served as a director of the Company since October 1997 and 
has served on the faculty of the Walter A. Haas School of Business, University  
of California, Berkeley and Co-Director of the Berkeley Center for Marketing    
and Technology from 1992 to the present. Prior to that time, Mr. Glazer served  
on the faculty of the Columbia University Graduate School of Business.          

All directors of the Company currently hold office until the next annual    
meeting of the Company's shareholders or until their successors are elected     
and qualified. The Company's Board of Directors have been divided into three    
classes serving staggered three-year terms. See "Risk Factors--Antitakeover     
Considerations." At each annual meeting of the Company's shareholders,          
successors to the class of directors whose term expires at such meeting will    
be elected to serve for three-year terms and until their successors are         
elected and qualified. Officers are elected by, and serve at the discretion     
of, the Board of Directors. See "Description of Capital Stock--Certain          
Provisions of the Company's Articles and Bylaws."                               

Except for Eric E. Stakland and Ronald B. Stakland, who are brothers, there 
are no family relationships among any of the directors and executive officers   
of the Company.                                                                 

COMMITTEES OF THE BOARD OF DIRECTORS                                            

Audit Committee. The Board of Directors has established an Audit Committee. 
The Audit Committee currently consists of Messrs. Henderson and Baumgartner,    
and is charged with recommending the engagement of independent accountants to   
audit the Company's financial statements, discussing the scope and results of   
the audit with the independent accountants, reviewing the functions of the      
Company's management and independent accountants pertaining to the Company's    
financial statements and performing such other related duties and functions as  
are deemed appropriate by the Audit Committee and the Board of Directors.       

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Compensation Committee. The Board of Directors has established a            
Compensation Committee. The Compensation Committee is comprised solely of       
"disinterested persons" or "Non-Employee Directors" as such term is used in     
Rule 16b-3 promulgated under the Exchange Act, and "outside directors" as such  
term is used in Treasury Regulation Section 1.162-27(c)(3) promulgated under    
the Internal Revenue Code of 1986, as amended (the "Code"). Messrs. Henderson   
and Baumgartner currently serve on the Compensation Committee, which is         
responsible for reviewing general policy matters relating to compensation and   
benefits of employees and officers, determining the total compensation of the   
officers and directors of the Company and administering the Company's Stock     
Option Plan.                                                                    

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION                     

The Board of Directors did not have a Compensation Committee during fiscal  
year 1996. As a result, Messrs. Gratzon and Rees, executive officers and the    
only members of the Board of Directors in 1996, participated in deliberations   
concerning executive officer compensation, including their own compensation.    
The Board of Directors has established a Compensation Committee comprised of    
directors who are not executive officers or employees of the Company.           

DIRECTOR REMUNERATION                                                           

Directors who are not employees of the Company receive an annual fee in the 
form of options exercisable for 10,000 shares of the Company's Common Stock,    
but will not receive a meeting fee for their participation at board meetings    
and committee meetings. All directors will be reimbursed for out-of-pocket      
expenses incurred in connection with attendance at board and committee          
meetings. The Company may, from time to time and in the sole discretion of the  
Company's Board of Directors, grant options to directors under the Company's    
Stock Option Plan.                                                              

EXECUTIVE COMPENSATION                                                          

The following table sets forth certain summary information concerning       
compensation for services in all capacities awarded to, earned by or paid to,   
the Company's Chief Executive Officer and each of the four other most highly    
compensated executive officers of the Company, whose aggregate cash and cash    
equivalent compensation exceeded $100,000 (collectively, the "Named             
Officers"), with respect to the year ended December 31, 1996.                   

SUMMARY COMPENSATION TABLE  

                                                        [Enlarge/Download Table]

                                                                  LONG-TERM                  
                                                                COMPENSATION                 
                          ANNUAL COMPENSATION                      AWARDS                    
                          --------------------                  ------------                 
                                                                 SECURITIES                  
 NAME OF INDIVIDUAL AND                          OTHER ANNUAL    UNDERLYING     ALL OTHER    
   PRINCIPAL POSITION     SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#)  COMPENSATION ($)
 ----------------------   ---------- --------- ---------------- ------------ ----------------
                                                                                             
Clifford Rees...........   $690,000  $250,000        --               --              --     
 Chief Executive Officer                                                                     
Fred Gratzon............    600,000   250,000        --               --              --     
 Chairman of the Board                                                                       
Ronald B. Stakland......    250,000    71,417        --               --              --     
 Senior Vice President--                                                                     
 International Services                                                                      
Michael Lackman.........    111,000    38,000        --               --              --     
 Vice President--                                                                            
 Intelligent Networks                                                                        
Richard P.                   44,418    85,147          7          147,958        $183,732(2) 
 DeAngelis(1)...........                                                                     
 Vice President--Sales &                                                                     
 Marketing                                                                                   

--------                                                                        
(1)  Mr. DeAngelis was employed by the Company from 1993 until May 30, 1997.    
(2)  Represents payments by the Company for earned commissions.                 

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STOCK OPTION GRANTS                                                             

The following table sets forth certain information regarding grants of      
options to purchase Common Stock made by the Company during the fiscal year     
ended December 31, 1996 to each of the Named Officers. No stock appreciation    
rights were granted during 1996.                                                

OPTION GRANTS IN 1996 INDIVIDUAL GRANTS 

                                                        [Enlarge/Download Table]

                                                                        POTENTIAL REALIZABLE VALUE 
                                                                         AT ASSUMED ANNUAL RATES   
                         NUMBER OF     PERCENT OF                                   OF             
                         SECURITIES   TOTAL OPTIONS                      STOCK PRICE APPRECIATION  
                         UNDERLYING    GRANTED TO   EXERCISE              FOR OPTION TERM ($)(2)   
                          OPTIONS     EMPLOYEES IN   PRICE/  EXPIRATION ---------------------------
          NAME            GRANTED      1996 (%)(1)  (SHARE)     DATE        (5%)         (10%)     
          ----           ----------   ------------- -------- ---------- ------------- -------------
                                                                                                   
Richard P.                                                                                         
 DeAngelis(3)...........  147,958(4)      9.07%      $1.31     1/1/06   $     122,257 $    309,823 

--------                                                                        
(1)  The Company granted options to purchase a total of 1,631,031 shares of     
Common Stock in 1996.                                                 
(2)  Represents amounts that may be realized upon exercise of options           
  immediately prior to the expiration of their term assuming the specified
compounded rates of appreciation (5% and 10%) on the Common Stock over
  the terms of the options. These assumptions do not reflect the Company's
   estimate of future stock price appreciation. Actual gains, if any, on the
stock option exercises and Common Stock holdings are dependent on the 
 timing of such exercise and the future performance of the Common Stock.
  There can be no assurance that the rates of appreciation assumed in this
 table can be achieved or that the amounts reflected will be received by
the option holder.                                                    
(3)  Mr. DeAngelis was employed by the Company from 1993 until May 30, 1997.    
(4)  One half, or 73,979 shares, are performance based options conditioned      
upon reaching certain sales objectives. Such sales objectives were met
during the fourth quarter of 1996.                                    

OPTION EXERCISES AND HOLDINGS                                                   

The following table sets forth certain information as of December 31, 1996, 
regarding options to purchase Common Stock held by each of the Named Officers.  
None of the Named Officers exercised any stock options or stock appreciation    
rights during fiscal year 1996.                                                 

FISCAL 1996 YEAR-END OPTION VALUES  

                                                        [Enlarge/Download Table]

                              NUMBER OF SECURITIES                VALUE OF UNEXERCISED   
                             UNDERLYING UNEXERCISED             "IN-THE-MONEY" OPTIONS AT
                         OPTIONS AT FISCAL YEAR-END (#)          FISCAL YEAR-END ($) (1) 
                         ------------------------------------   -------------------------
                          EXERCISABLE         UNEXERCISABLE     EXERCISABLE UNEXERCISABLE
                         -----------------   ----------------   ----------- -------------
                                                                                         
Richard P.                                                                               
 DeAngelis(2)...........             147,958                --    973,078        --      

--------                                                                        
(1)  Options are in the money if the fair market value of the underlying        
securities exceeds the exercise price of the options. The amounts set 
  forth represent the difference between $7.89 per share, the market value
of the Common Stock issuable upon exercise of options at December 31, 
   1996 (as determined by the Board of Directors), and the exercise price of
  the option, multiplied by the applicable number of shares underlying the
options.                                                              
(2)  Mr. DeAngelis was employed by the Company from 1993 until May 30, 1997.    

EMPLOYMENT AGREEMENTS                                                           

On April 7, 1997, the Company entered into employment agreements (the       
"Employment Agreements") with each of Mr. Gratzon and Mr. Rees pursuant to      
which Mr. Gratzon has agreed to serve as Chairman of the Board and Mr. Rees     
has agreed to serve as President and Chief Executive Officer of the Company.    
The Employment Agreements provide for an annual base salary for each of Mr.     
Gratzon and Mr. Rees of $500,000                                                

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and incentive compensation of up to $500,000. The incentive compensation        
component of the Employment Agreements will be calculated and shared equally    
between Mr. Gratzon and Mr. Rees as follows: (i) a total of $1 million if EBT   
(as defined below) for the immediately preceding year is $2 million or more     
and; (ii) the excess of EBT over $1 million if EBT for the immediately          
preceding year is between $1 million and $2 million. As defined more            
particularly in the Employment Agreements "EBT" is equal to the sum of net      
income of the Company and its Subsidiaries, plus any provision for income       
taxes deducted in computing net income. The Employment Agreements provide that  
any additional annual base salary and incentive compensation will be at the     
discretion of the Compensation Committee, will be commensurate with bonuses     
paid to other employees of the Company and will take into account total         
compensation paid to executives of competitors of the Company.                  

The Employment Agreements expire on December 31, 2000, unless earlier       
terminated in accordance with their terms. In addition, the Employment          
Agreements contain a non-competition covenant which prohibits Mr. Rees and Mr.  
Gratzon from, during the term of their employment with the Company and for a    
period of one year following the termination of the Employment Agreements in    
most circumstances, working for any company that competes with the Company as   
of the date of termination, without the written consent of the Company.         

INDEMNIFICATION AGREEMENTS                                                      

The Company has entered into indemnification agreements with certain of its 
executive officers and directors (collectively, the "Indemnification            
Agreements"). Pursuant to the terms of the Indemnification Agreements, each of  
the executive officers and directors who are parties thereto will be            
indemnified by the Company to the full extent provided by law in the event      
such officer or director is made or threatened to be made a party to a claim    
arising out of such person acting in his capacity as an officer or director of  
the Company. The Company has further agreed that, upon a change in control, as  
defined in the Indemnification Agreements, the rights of such officers and      
directors to indemnification payments and expense advances will be determined   
in accordance with the provisions of the Iowa Business Corporation Act and      
that, upon a potential change of control, as defined in the Indemnification     
Agreements, it will create a trust in an amount sufficient to satisfy all       
indemnity expenses reasonably anticipated at the time a written request to      
create such a trust is submitted by an officer or director.                     

AMENDED AND RESTATED STOCK OPTION PLAN                                          

On April 9, 1997, the Board of Directors of the Company adopted and the     
shareholders of the Company approved the Amended and Restated 1996 Stock        
Option Plan (the "Stock Option Plan"), which provides for the grant to          
officers, key employees and directors of the Company and its Subsidiaries of    
both "incentive stock options" within the meaning of Section 422 of the Code,   
and stock options that are non-qualified for federal income tax purposes. The   
total number of shares for which options may be granted pursuant to the Stock   
Option Plan is 4,000,000 and the maximum number of shares for which options     
may be granted to any person is 1,875,000 shares, subject to certain            
adjustments to reflect changes in the Company's capitalization. The Stock       
Option Plan is currently administered by the Company's Board of Directors.      
Upon the completion of the Offering, the Stock Option Plan will be              
administered by the Compensation Committee. The Compensation Committee will     
determine, among other things, which officers, employees and directors will     
receive options under the plan, the time when options will be granted, the      
type of option (incentive stock options, non-qualified stock options, or both)  
to be granted, the number of shares subject to each option, the time or times   
when the options will become exercisable, and, subject to certain conditions    
discussed below, the option price and duration of the options. Members of the   
Compensation Committee are not eligible to receive options under the Stock      
Option Plan, but are entitled to receive options as directors.                  

The exercise price of incentive stock options are determined by the         
Compensation Committee, but may not be less than the initial public offering    
price if granted prior to the Offering or the fair market value of the Common   
Stock on the date of grant if granted after the Offering and the term of any    
such option may not exceed ten years from the date of grant. With respect to    
any participant in the Stock Option Plan who owns stock representing more than  
10% of the voting power of all classes of the outstanding capital stock of the  
Company                                                                         

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or of its Subsidiaries, the exercise price of any incentive stock option may    
not be less than 110% of the fair market value of such shares on the date of    
grant and the term of such option may not exceed five years from the date of    
grant.                                                                          

The exercise price of non-qualified stock options are determined by the     
Compensation Committee on the date of grant. In the case of non-qualified       
stock options granted on or before the earliest of (i) the expiration or        
termination of the Stock Option Plan; (ii) the material modification of the     
Stock Option Plan; (iii) the issuance of all options under the Stock Option     
Plan; or (iv) the first meeting of shareholders at which Directors are elected  
occurring after the year 2000 (the "Reliance Period"), the exercise price of    
such options may not be less than the initial public offering price if granted  
prior to the Offering or the fair market value of the Common Stock on the date  
of grant if granted after the Offering. In the case of non-qualified stock      
options granted after the Reliance Period, the exercise price of such options   
may not be less than the fair market value of the Common Stock on the date of   
grant. In either case, the term of such options may not exceed ten years from   
the date of grant.                                                              

Payment of the option price may be made in cash or, with the approval of the
Compensation Committee, in shares of Common Stock having a fair market value    
in the aggregate equal to the option price. Options granted pursuant to the     
Stock Option Plan are not transferable, except by will or the laws of descent   
and distribution. During an optionee's lifetime, the option is exercisable      
only by the optionee.                                                           

The Compensation Committee has the right at any time and from time to time  
to amend or modify the Stock Option Plan, without the consent of the Company's  
shareholders or optionees; provided, that no such action may adversely affect   
options previously granted without the optionee=s consent, and provided         
further that no such action, without the approval of a majority of the          
shareholders of the Company, may increase the total number of shares of Common  
Stock which may be purchased pursuant to options under the Stock Option Plan,   
increase the total number of shares of Common Stock which may be purchased      
pursuant to options under the Stock Option Plan by any person, expand the       
class of persons eligible to receive grants of options under the Stock Option   
Plan, decrease the minimum option price, extend the maximum term of options     
granted under the Stock Option Plan, extend the term of the Stock Option Plan   
or change the performance criteria on which the granting of options is based.   
The expiration date of the Stock Option Plan after which no option may be       
granted thereunder, is April 1, 2007.                                           

The Company has filed with the Commission a registration statement on Form  
S-8 covering the shares of Common Stock underlying options granted under the    
Stock Option Plan.                                                              

As of December 31, 1996, options to purchase an aggregate of 1,631,031      
shares of Common Stock were granted under the original 1996 Stock Option Plan.  
The outstanding options were held by 320 individuals and were exercisable at    
$1.31 per share. During 1996, certain stock options were granted with exercise  
prices below the estimated fair market value of such shares. As a result, the   
Company recognized stock option based compensation of $1,032,646 during the     
year ended December 31, 1996. Shares subject to options granted under the plan  
that have lapsed or terminated may again be subject to options granted under    
the plan.                                                                       

Certain Federal Income Tax Consequences. The following discussion is a      
summary of the principal United States federal income tax consequences under    
current federal income tax laws relating to option grants to employees under    
the Stock Option Plan. This summary is not intended to be exhaustive and,       
among other things, does not describe state, local or foreign income and other  
tax consequences.                                                               

An optionee will not recognize any taxable income upon the grant of a non-  
qualified option and the Company will not be entitled to a tax deduction with   
respect to such grant. Generally, upon exercise of a non-qualified option, the  
excess of the fair market value of the Common Stock on the exercise date over   
the exercise price will be taxable as compensation income to the optionee.      
Subject to the discussion below with respect to Section 162(m) of the Code and  
the optionee including such compensation in income or the Company satisfying    
applicable reporting requirements, the Company will be entitled to a tax        
deduction in the amount of such compensation income. The optionee=s tax basis   
for the Common Stock received pursuant to such exercise will                    

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equal the sum of the compensation income recognized and the exercise price.     
Special rules may apply in the case of an optionee who is subject to Section    
16 of the Exchange Act.                                                         

In the event of a sale of Common Stock received upon the exercise of a non- 
qualified option, any appreciation or depreciation after the exercise date      
generally will be taxed to the optionee as capital gain or loss and will be     
long-term capital gain or loss if the holding period for such Common Stock was  
more than one year.                                                             

Subject to the discussion below, an optionee will not recognize taxable     
income at the time of grant or exercise of an "incentive stock option" and the  
Company will not be entitled to a tax deduction with respect to such grant or   
exercise. The exercise of an "incentive stock option" generally will give rise  
to an item of tax preference that may result in alternative minimum tax         
liability for the optionee.                                                     

Generally, a sale or other disposition by an optionee of shares acquired    
upon the exercise of an "incentive stock option" more than one year after the   
transfer of the shares to such optionee and more than two years after the date  
of grant of the "incentive stock option" will result in any difference between  
the amount realized and the exercise price being treated as long-term capital   
gain or loss to the optionee, with no deduction being allowed to the Company.   
Generally, upon a sale or other disposition of shares acquired upon the         
exercise of an "incentive stock option" within one year after the transfer of   
the shares to the optionee or within two years after the date of grant of the   
"incentive stock option," any excess of (i) the lesser of (a) the fair market   
value of the shares at the time of exercise of the option and (b) the amount    
realized on such sale or other disposition over (ii) the exercise price of      
such option will constitute compensation income to the optionee. Subject to     
the discussion below with respect to Section 162(m) of the Code and the         
optionee including such compensation in income or the Company satisfying        
applicable reporting requirements, the Company will be entitled to a deduction  
in the amount of such compensation income. The excess of the amount realized    
on such sale or disposition over the fair market value of the shares at the     
time of the exercise of the option generally will constitute short-term or      
long-term capital gain and will not be deductible by the Company.               

Section 162(m) of the Code disallows a federal income tax deduction to any  
publicly held corporation for compensation paid in excess of $1,000,000 in any  
taxable year to the chief executive officer or any of the four other most       
highly compensated executive officers who are employed by the corporation on    
the last day of the taxable year. Under regulations promulgated under Section   
162(m), the deduction limitation of Section 162(m) does not apply to any        
compensation paid pursuant to a plan that existed during the period in which    
the corporation was not publicly held, to the extent the prospectus             
accompanying the initial public offering disclosed information concerning such  
plan that satisfied all applicable securities laws. However, the foregoing      
exception may be relied upon only for awards made before the earliest of (i)    
the expiration of the plan; (ii) the material modification of the plan; (iii)   
the issuance of all stock allocated under the plan; or (iv) the first meeting   
of shareholders at which directors are elected occurring after the close of     
the third calendar year following the calendar year in which the initial        
public offering occurs (the "Reliance Period"). The compensation attributable   
to awards granted under the Company's Stock Option Plan during the Reliance     
Period is not subject to the deduction limitation of Section 162(m). The        
Company has structured and implemented the Stock Option Plan in a manner so     
that compensation attributable to awards made after the Reliance Period will    
not be subject to the deduction limitation.                                     

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CERTAIN TRANSACTIONS  

PRINCIPAL SHAREHOLDERS REGISTRATION RIGHTS AGREEMENT                            

In connection with the IPO, the Company and each of Clifford Rees, Fred     
Gratzon, Shelley Levin-Gratzon and Ronald Stakland (the "Principal              
Shareholders") entered into a registration rights agreement (the "Principal     
Shareholders Registration Rights Agreement") granting the Principal             
Shareholders and certain other shareholders demand and incidental registration  
rights in connection with their ownership of shares of Common Stock. See        
"Description of Capital Stock--Registration Rights--Principal Shareholders."    

ACQUISITION OF COUNTRY COORDINATOR'S OPERATIONS                                 

The Company acquired substantially all of the assets of Telegroup South     
Europe, Inc., a Pennsylvania corporation ("TGSE") and Telecontinent, S.A., a    
French company ("Telecontinent"). George Apple, the Company's Country           
Coordinator in France, owned all of the issued and outstanding shares of TGSE   
and substantially all of the shares of Telecontinent. Pursuant to separate      
agreements, the Company paid Mr. Apple aggregate consideration of $1,031,547    
in cash and 262,116 shares of the Company's Common Stock for TGSE and           
Telecontinent.                                                                  

LOANS TO CERTAIN EXECUTIVE OFFICERS                                             

The Company has from time to time made various personal loans to Messrs.    
Gratzon and Rees, the Chairman of the Board and President, respectively. Mr.    
Gratzon received loans from the Company, during 1996, in the aggregate amount   
of $162,318, at an interest rate equal to 12% per annum, all of which were      
repaid in full by Mr. Gratzon in November 1996. The largest aggregate amount    
of indebtedness owed by Mr. Gratzon to the Company at any time during 1996 was  
$162,318.                                                                       

Mr. Rees received loans from the Company during 1994 and 1995, and in       
October 1996 in the aggregate amount of $135,878, at interest rates equal to    
12% per annum. These loans were repaid in full by Mr. Rees in November 1996.    
The largest aggregate amount of indebtedness owed by Mr. Rees to the Company    
at any time during 1996 was $135,878.                                           

MANAGEMENT AGREEMENT                                                            

During 1994, 1995 and a portion of 1996, the Company had a management       
agreement with an affiliate of the Company owned by Messrs. Gratzon and Rees    
pursuant to which it paid a management fee, determined annually, plus an        
incentive fee based upon performance, to Messrs. Gratzon and Rees. Amounts      
paid to Messrs. Gratzon and Rees under this agreement totaled $1,155,000,       
$1,334,000 and $415,000 during 1994, 1995 and 1996, respectively. The           
management agreement was terminated on May 15, 1996.                            

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PRINCIPAL SHAREHOLDERS  

The following table sets forth certain information regarding beneficial     
ownership of the Company's Common Stock as of September 30, 1997, by (i) each   
person known by the Company to beneficially own five percent or more of any     
class of the Company's capital stock, (ii) each director of the Company, (iii)  
each executive officer of the Company that is a Named Officer and (iv) all      
directors and executive officers of the Company as a group. All information     
with respect to beneficial ownership has been furnished to the Company by the   
respective shareholders of the Company.                                         

                                                                [Download Table]

                                       NUMBER OF SHARES OF                    
                                          COMMON STOCK      PERCENTAGES AS OF 
BENEFICIAL OWNER                      BENEFICIALLY OWNED(1) SEPTEMBER 30, 1997
----------------                      --------------------- ------------------
                                                                              
Fred Gratzon and Shelley Levin-                                               
 Gratzon.............................      11,836,653(2)           38.5%      
Clifford Rees........................      11,683,215(3)           38.0%      
Ronald B. Stakland...................         773,004(4)            2.5%      
Michael Lackman......................         518,988               1.7%      
Douglas A. Neish.....................         120,559                 *       
J. Sherman Henderson III.............               0                 *       
Steven J. Baumgartner................               0                 *       
Rashi Glazer.........................               0                 *       
All directors and executive officers                                          
 as a group (17 persons).............      25,162,577              80.9%      

--------                                                                        
*  Represents beneficial ownership of less than 1% of the outstanding shares    
of Common Stock.                                                          
(1) Beneficial ownership is determined in accordance with the rules of the      
Commission. In computing the number of shares beneficially owned by a   
person and the percentage of ownership of that person, shares of Common 
Stock subject to options and warrants held by that person that are      
  currently exercisable or exercisable within 60 days of October 8, 1997 are
deemed outstanding. Such shares, however, are not deemed outstanding for
  the purposes of computing the percentage of ownership of any other person.
Except as otherwise indicated, and subject to community property laws   
where applicable, the persons named in the table above have sole voting 
and investment power with respect to all shares of Common Stock shown as
owned by them. The address of each of the persons in this table is as   
follows: c/o Telegroup, Inc., 2098 Nutmeg Avenue, Fairfield, Iowa 52556.
(2) Represents (i) 5,918,326 shares of Common Stock owned by Fred Gratzon and   
Shelley Levin-Gratzon as joint tenants, (ii) 2,239,580 shares of Common 
 Stock held by the Fred Gratzon Revocable Trust, (iii) 2,239,580 shares of
Common Stock held by the Shelley L. Levin-Gratzon Revocable Trust, (iv) 
1,265,201 shares of Common Stock owned by the Gratzon Family Partnership
 II, L.P., a Georgia limited partnership, and (v) 173,966 shares of Common
Stock owned by the Gratzon Family Partnership I, L.P., a Georgia limited
 partnership. Fred Gratzon and Shelley Levin-Gratzon are husband and wife,
and together they (i) serve as trustees of the two trusts referenced in 
  the prior sentence and (ii) own and/or control the general partners of the
two partnerships referenced in the prior sentence. Fred Gratzon is the  
sole beneficiary of the Fred Gratzon Revocable Trust and Shelley Levin- 
 Gratzon is the sole beneficiary of the Shelley L. Levin-Gratzon Revocable
Trust.                                                                  
(3) Represents (i) 4,804,629 shares of Common Stock owned by Lakshmi Partners,  
L.P., a Georgia limited partnership, of which a corporation owned and/or
controlled by Mr. Rees serves as the general partner, and (ii) 6,878,586
 shares of Common Stock are held by a revocable trust of which Mr. Rees is
the trustee and sole beneficiary.                                       
(4) Represents (i) 663,406 shares of Common Stock owned by Ronald Stakland and  
(ii) 109,598 shares of Common Stock held by the Stakland Family Trust,  
Ernst & Young Trustees Limited.                                         

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SELLING SHAREHOLDERS  

The following table sets forth the number of shares of the Company's Common 
Stock to be offered by the Selling Shareholders named herein, and, as of        
December 15, 1997, the number and percentage of shares beneficially owned       
prior to the offering made hereby and number of shares offered pursuant to      
this Prospectus.                                                                

                                                                [Download Table]

                                               SHARES OWNED                    
                                            PRIOR TO OFFERING   SHARES OFFERED 
                                            ------------------ PURSUANT TO THIS
                   NAME                     NUMBER  PERCENTAGE    PROSPECTUS   
                   ----                     ------- ---------- ----------------
                                                                               
Smith Barney Inc. ........................   20,406                            
Hare and Co. .............................    2,782                            
Greenwich Street Capital Partners, L.P. ..  153,310                            
Greenwich Street Capital Offshore Fund,                                        
 Ltd. ....................................    9,343                            
TRV Employees Fund, L.P. .................   37,458                            
The Travelers Insurance Company...........    7,765                            
The Travelers Life and Annuity Company....    3,825                            

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DESCRIPTION OF CAPITAL STOCK  

GENERAL                                                                         

The authorized capital stock of the Company consists of 150,000,000 shares  
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no     
par value. The statements under this caption are summaries of all material      
provisions of the Company's Second Restated Articles of Incorporation (the      
"Second Restated Articles of Incorporation") and Amended and Restated Bylaws    
(the "Bylaws"), relating to the Company's capital stock which are filed as      
exhibits to the Registration Statement of which this Prospectus is a part.      
Such summaries do not purport to be complete and are subject to, and are        
qualified in their entirety by reference to, such documents.                    

THE RECAPITALIZATION                                                            

In July 1996, the Company adopted amended Articles and Bylaws. The Articles 
provide for the reclassification of the Company's Class A Common Stock, no par  
value, and its nonvoting Class B Common Stock, no par value, into a single      
class of voting Common Stock, no par value, (the "Reclassification"). The       
Articles also provide for "blank check" preferred stock. See "--Preferred       
Stock." In addition, the Company effected an approximately 5.48-for-one stock   
split of its then existing Common Stock (the "Stock Split"). The                
Reclassification and the Stock Split are referred to collectively herein as     
the "Recapitalization."                                                         

COMMON STOCK                                                                    

As of December 15, 1997, there were     shares of Common Stock outstanding  
and held of record by approximately     holders of record. Holders of shares    
of Common Stock are entitled to one vote per share on all matters on which the  
holders of Common Stock are entitled to vote and do not have any cumulative     
voting rights. This means that the holders of more than 50% of the shares       
voting for the election of directors can elect all of the directors if they     
choose to do so; and, in such event, the holders of the remaining shares of     
Common Stock will not be able to elect any person to the Board of Directors.    
Subject to the rights of the holders of shares of any series of Preferred       
Stock, holders of Common Stock are entitled to receive such dividends as may    
from time to time be declared by the Board of Directors of the Company out of   
funds legally available therefor. See "Dividends." Holders of shares of Common  
Stock have no preemptive, conversion, redemption, subscription or similar       
rights. In the event of a liquidation, dissolution or winding up of the         
Company, whether voluntary or involuntary, holders of shares of Common Stock    
are entitled to share ratably in the assets of the Company which are legally    
available for distribution, if any, remaining after the payment or provision    
for the payment of all debts and other liabilities of the Company and the       
payment and setting aside for payment of any preferential amount due to the     
holders of shares of any series of Preferred Stock. All outstanding shares of   
Common Stock are, and all shares of Common Stock offered hereby when issued     
will be, upon payment therefor, validly issued, fully paid and nonassessable.   
At present there is no established trading market for the Common Stock. The     
Common Stock has been approved for quotation on the Nasdaq National market      
under the proposed symbol "TGRP," subject to official notice of issuance.       

PREFERRED STOCK                                                                 

The Company's Board of Directors is authorized to issue from time to time up
to 10,000,000 shares of Preferred Stock in one or more series and to fix the    
rights, designations, preferences, qualifications, limitations and              
restrictions thereof, including dividend rights, dividend rates, conversion     
rights, voting rights, terms of redemption, redemption prices, the terms of     
any sinking fund, liquidation preferences and the number of shares              
constituting any series, without any further action by the shareholders of the  
Company. The issuance of Preferred Stock with voting rights could have an       
adverse effect on the voting power of holders of Common Stock by increasing     
the number of outstanding shares. In addition, if the Board of Directors        
authorizes Preferred Stock with conversion rights, the number of shares of      
Common Stock outstanding could potentially be increased up to the amount        
authorized under the Articles. The issuance of Preferred Stock could decrease   
the amount of earnings                                                          

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and assets available for distribution to holders of Common Stock. Any such      
issuance could also have the effect of delaying, deterring or preventing a      
change in control of the Company and may adversely affect the rights of         
holders of Common Stock. The Board of Directors does not currently intend to    
issue any shares of Preferred Stock.                                            

WARRANTS                                                                        

As of December 31, 1996, there were outstanding Warrants granting the       
holders of the Warrants the right to acquire up to 1,160,107 shares of Common   
Stock. Pursuant to their terms, the Warrants will be adjusted on July 2, 1997   
to increase the number of shares issuable upon exercise of the Warrants to      
4.5% of the issued and outstanding shares of Common Stock as of such date,      
less certain excluded shares. In the event that the Company does not complete   
the Offering prior to January 2, 1998, the holders of the Warrants will have    
the right to acquire up to an additional 0.5% of the issued and outstanding     
Shares of Common Stock on a fully diluted basis on such date, less certain      
excluded shares. The Warrants are exercisable at any time prior to November     
28, 2003. The Warrants are entitled to certain antidilution protection in the   
event of additional issuances of Common Stock, stock splits, stock dividends,   
reorganizations and other similar events. The shares of Common Stock issued     
pursuant to the exercise of the Warrants are entitled to certain registration   
rights described below. As a result of certain options which were granted       
since March 31, 1997 and pursuant to the adjustments described above, the       
holders of Warrants will have the right to acquire 1,327,500 shares of Common   
Stock.                                                                          

REGISTRATION RIGHTS                                                             

Holders of the Warrants. The holders of the Warrants were granted           
registration rights pursuant to the Warrant Shares Registration Rights          
Agreement with the Company. Under the Warrant Shares Registration Rights        
Agreement, a majority of the holders of the Warrants will be entitled to        
demand registration of their shares once in each of the two years following     
the Offering, provided that any exercise must include at least twenty percent   
(20%) of the shares into which the Warrants are exercisable (the "Warrant       
Shares"). The holders of the Warrants have piggyback registration rights with   
respect to all registrations by the Company (other than a registration          
statement filed on Form S-4 or S-8), including the Offering, pursuant to the    
following priority rules: (i) in the case of the Offering, the Company has      
first priority, the holders of the Warrants have second priority (with respect  
to up to fifty percent (50%) of the Warrant Shares then held by such holders    
of the Warrants), other shareholders have third priority (up to 4.5% of the     
issued and outstanding shares of Common Stock prior to the Offering), and       
thereafter the holders of the Warrants and other shareholders share on a one-   
third to two-thirds basis; (ii) in the case of all other underwritten           
offerings the Company has first priority, and the holders of the Warrants and   
other shareholders (with rights to participate in the offering) have second     
priority, pro rata with their holdings; and (iii) in all other offerings, the   
Company has first priority, other shareholders with demand registration rights  
have second priority, and the holders of the Warrants and all holders of        
piggyback registration rights have third priority, pro rata with their          
holdings. Pursuant to the terms of the Warrant Shares Registration Rights       
Agreement, the Company agreed to (i) pay all fees and expenses incurred with    
any registration, except for all underwriting discounts and commissions         
relating to the Common Stock sold by such holders, which will be borne by the   
holders thereof, and (ii) indemnify the holders in connection with any          
registration effected pursuant to the Warrant Shares Registration Rights        
Agreement, including liabilities under the Securities Act.                      

Principal Shareholders. Prior to completion of the Offering, the Principal  
Shareholders will be granted registration rights pursuant to the Principal      
Shareholders Registration Rights Agreement. Under the Principal Shareholders    
Registration Rights Agreement, the Principal Shareholders are entitled to       
demand registration of their shares once in each of the two years following     
the date the Company is eligible to file a registration statement on Form S-3,  
provided that any such demand must include at least twenty percent (20%) of     
the shares beneficially owned by the Principal Shareholders on the date of      
such demand.                                                                    

The Principal Shareholders have piggyback registration rights with respect  
to all other registrations by the Company (other than a registration statement  
filed on Form S-4 or S-8), pursuant to the following priority rules: (i) in     
the case of any underwritten registration on behalf of the Company, the         
Company has first priority, and the Principal Shareholders and other            
shareholders (with rights to participate in the offering) have second           
priority,                                                                       

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pro rata with their holdings; and (ii) in any underwritten secondary            
registration on behalf of the Company's shareholders other than the Principal   
Shareholders, the other shareholders with priority demand registration rights   
have first priority, and the Principal Shareholders and all holders of          
incidental registration rights have second priority, pro rata with their        
holdings.                                                                       

CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES AND BYLAWS                         

The Company's Second Restated Articles of Incorporation contain a provision 
that eliminates the personal liability of the Company's directors to the        
Company or its shareholders for monetary damages for breach of fiduciary duty   
as a director, except (i) for liability for any breach of the director's duty   
of loyalty to the Corporation or its shareholders, (ii) for acts or omissions   
not in good faith or which involve intentional misconduct or knowing violation  
of the law, (iii) for any transactions from which the director derived an       
improper personal benefit, or (iv) for unlawful distributions in violation of   
Section 490.833 of the Iowa Business Corporation Act. Any repeal or amendment   
of this provision by the shareholders of the Corporation will not adversely     
affect any right or protection of a director existing at the time of such       
repeal or amendment.                                                            

In addition, the Company's Bylaws provide that the Company will indemnify   
directors and officers of the Company to the fullest extent permitted by the    
Iowa Business Corporation Act. The Second Restated Articles of Incorporation    
and Bylaws include certain provisions which are intended to enhance the         
likelihood of continuity and stability in the composition of the Company's      
Board of Directors and which may have the effect of delaying, deterring or      
preventing a future takeover or change in control of the Company unless such    
takeover or change in control is approved by the Company's Board of Directors.  
Such provisions may also render the removal of the directors and management     
more difficult.                                                                 

The Second Restated Articles of Incorporation provide that the Board of     
Directors of the Company be divided into three classes serving staggered        
three-year terms. The Company's Second Restated Articles of Incorporation or    
Bylaws and/or the Iowa Business Corporation Act include restrictions on who     
may call a special meeting of shareholders and/or that shareholders may only    
act at an annual or special meeting or with the written consent of holders of   
at least 90% of the outstanding shares of Common Stock. The Company's Bylaws    
contain an advance notice procedure with regard to the nomination, other than   
by or at the direction of the Board of Directors, of candidates for election    
as directors and with regard to certain matters to be brought before an annual  
meeting of shareholders of the Company. In general, notice must be received by  
the Company not less than 90 days prior to the meeting and must contain         
certain specified information concerning the person to be nominated or the      
matter to be brought before the meeting and concerning the shareholder          
submitting the proposal. The Second Restated Articles of Incorporation and      
Bylaws provide that the affirmative vote of the holders of at least 65% of the  
voting stock of the Company is required to amend the foregoing provisions.      

The Second Restated Articles of Incorporation contain provisions restricting
certain "Business Combinations". The Second Restated Articles of Incorporation  
require the affirmative vote of at least 65% of the outstanding shares of       
voting stock of the Company for the approval of certain material transactions   
between the Company and any individual, corporation, partnership or other       
person or entity which, together with its affiliates and associates             
beneficially owns in the aggregate 20% or more of the outstanding voting stock  
of the Company ("Substantial Shareholder") unless one of the following is       
true: (1) 2/3 of the "Continuing Directors" on the Board (a) have approved in   
advance the acquisition that caused the Substantial Shareholder to become a     
Substantial Shareholder or (b) have approved the Business Combination prior to  
the Substantial Shareholder involved in the Business Combination having become  
a Substantial Shareholder; (2) the Business Combination is solely between the   
Company and one of its wholly owned subsidiaries; or (3) the Business           
Combination is a merger or consolidation and the consideration per share by     
holders of Common Stock of the Company in the Business Combination satisfies    
the "fair price" requirements in the Second Restated Articles of                
Incorporation. In general, a "fair-price" is not less than the greater of (a)   
the highest per share price paid by the Substantial Shareholder in acquiring    
any of it shares of stock of the Company or (b) an amount which bears the same  
or greater percentage relationship to the market price of the Common Stock of   
the Company immediately prior to                                                

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the announcement of the Business Combination equal to the highest percentage    
relationship that any per share price theretofore paid by the Substantial       
Shareholder for any of its holdings of Common Stock of the Company bore to the  
market price of the Common Stock of the Company immediately prior to            
commencement of the acquisition by the Substantial Shareholder. "Continuing     
Director" means, with respect to a particular Substantial Shareholder, a        
member of the Company's Board of Directors who was (1) a member prior to the    
date on which a Substantial Shareholder became a Substantial Shareholder or     
(2) designated as a Continuing Director by a majority of the whole board, but   
only if a majority of the whole board shall then consist of Continuing          
Directors, or if a majority of the whole board does not then consist of         
Continuing Directors, by a majority of the then Continuing Directors.           

"Business combinations" subject to this approval requirement include        
mergers, share exchanges, material dispositions of corporate assets not in the  
ordinary course of business, certain dispositions to a Substantial Shareholder  
of voting stock of the Company, or any reclassification, including reverse      
stock splits, recapitalization or merger of the Company with its subsidiaries,  
which increases the percentage of voting stock owned beneficially by a          
Substantial Shareholder. The "Business Combination" provisions of the Second    
Restated Articles of Incorporation may not be repealed or amended in any        
respect, unless such action is approved by the affirmative vote of the holders  
of not less than 65% of the outstanding shares of voting stock of the Company;  
provided, that if an amendment is recommended to shareholders by 2/3 of the     
whole board of directors when a majority of the members of the board of         
directors acting upon such matters are Continuing Directors then the            
affirmative vote of the holders of not less than 50% of the outstanding shares  
of voting stock of the Company is required.                                     

IOWA BUSINESS CORPORATION ACT; ANTITAKEOVER EFFECTS                             

Under Chapter 502 of the Iowa Code a person making a "takeover offer,"      
defined as an offer to acquire any equity securities of a "target company"      
(defined as a public company with substantial assets in Iowa that is at least   
20% owned by Iowa residents) from an Iowa resident pursuant to a tender offer   
is required to file a registration statement with the designated Iowa public    
official if the bidder would then own 10% of any class of outstanding equity    
securities. Chapter 502 contains antifraud provisions and prohibits the         
acquisition of equity securities from an Iowa resident within two years         
following a takeover offer unless the holders are afforded a reasonable         
opportunity to sell to the offeror upon substantially equivalent terms as       
those provided in the earlier takeover offer.                                   

The Iowa Business Corporation Act provides that in considering acquisition  
proposals, directors may consider the effects on the Company's employees,       
suppliers, creditors, customers and the communities in which it operates, as    
well as the long-term and short-term interests of the Company. Consideration    
of any or all community interest factors is not a violation of the business     
judgment rule, even if the directors reasonably determine that effects on a     
community or other factors outweigh the financial or other benefits to the      
Company or a shareholder or group of shareholders. The Act also includes        
authorization of "poison pills" which include, without limitation, provisions   
that preclude or limit the exercise, transfer or receipt of stock rights by     
persons owning or offering to acquire a specified number or percentage of a     
corporation's outstanding shares. Unlike most states, Iowa does not presently   
have a "business combination" law prohibiting business combinations with a      
stockholder who holds over a specified percentage of stock for less than a      
specified period after crossing the threshold. See "--Certain Provisions of     
the Company's Articles and Bylaws."                                             

The foregoing provisions of state law could have the effect of delaying,    
deferring or preventing a change in control of the Company if the Board of      
Directors determines that a change of control is not in the best interest of    
the Company, its shareholders and other constituencies. In addition, the        
regulatory restrictions on acquisition of securities of the Company may also    
deter attempts to effect, or prevent the consummation of, a change in control   
of the Company.                                                                 

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DESCRIPTION OF CONVERTIBLE SUBORDINATED NOTES 

CONVERTIBLE NOTES                                                               

On September 30, 1997, the Company issued $25,000,000 in aggregate principal
amount of Convertible Notes. The Convertible Notes will mature on April 15,     
2005. The Convertible Notes are unsecured obligations of the Company and are    
subordinated to all existing and future Senior Indebtedness (as defined in the  
indenture governing the Convertible Notes, (the "Convertible Note Indenture"))  
of the Company, including the Notes offered hereby.                             

Interest. The Convertible Notes bear interest at 8% per annum, payable in   
cash, on each April 15 and October 15, commencing April 15, 1998; provided      
that, until the earlier of (x) April 15, 1999 or (y) the Final Note Interest    
Time (as defined in the Convertible Note Indenture), at the option of the       
Company, interest may be paid by the issuance of additional Convertible Notes.  

Conversion. The Convertible Notes are convertible into shares of Common     
Stock of the Company at any time on or before the business day next preceding   
April 15, 2005, unless previously redeemed, at a conversion price of $12.00     
per share, subject to adjustment upon the occurrence of certain events.         

Redemption. The Convertible Notes are redeemable, in whole or in part, at   
the option of the Company, at any time on or after October 15, 2000 at          
redemption prices (expressed as a percentage of the principal amount)           
declining annually from 104.0% beginning on October 15, 2000 to 100.0%          
beginning on October 15, 2003 and thereafter, together with accrued interest    
to the redemption date and subject to certain conditions.                       

Covenants. The Convertible Note Indenture places certain restrictions on the
ability of the Company and its Subsidiaries to (i) incur additional             
indebtedness, (ii) make restricted payments (dividends, redemptions and         
certain other payments), (iii) incur liens, (iv) enter into mergers,            
consolidations or acquisitions, (v) sell or otherwise dispose of property,      
business or assets, (vi) issue and sell preferred stock of a Subsidiary and     
(vii) engage in transactions with affiliates.                                   

Events of Default. The following are "Events of Default" under the          
Convertible Note Indenture:                                                     

 (i) default in the payment of the principal of or premium, if any, on any
Convertible Note when the same becomes due and payable (upon stated         
maturity, acceleration, optional redemption, required purchase, scheduled   
principal payment or otherwise); or                                         

(ii) default in the payment of an installment of interest on any of the 
Convertible Notes, when the same becomes due and payable, which default     
continues for a period of 30 days; or                                       

 (iii) failure to perform or observe any other term, covenant or agreement
contained in the Convertible Notes or the Indenture governing the           
Convertible Notes (other than a default specified in clause (i) or (ii)     
above) and such default continues for a period of 30 days after written     
notice of such default requiring the Company to remedy the same shall have  
been given (x) to the Company by the trustee or (y) to the Company and the  
trustee by holders of 25% in aggregate principal amount of the Convertible  
Notes then outstanding; or                                                  

(iv) default or defaults under one or more agreements, instruments,     
mortgages, bonds, debentures or other evidences of Indebtedness under which 
the Company or any Subsidiary of the Company then has outstanding           
Indebtedness in excess of $5,000,000, individually or in the aggregate, and 
either (a) such Indebtedness is already due and payable in full or (b) such 
default or defaults have resulted in the acceleration of the maturity of    
such Indebtedness; or                                                       

(v) one or more judgments, orders or decrees of any court or regulatory 
or administrative agency of competent jurisdiction for the payment of money 
in excess of $5,000,000, either individually or in the aggregate, shall be  
entered against the Company or any Subsidiary of the Company or any of      
their                                                                       

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respective properties and shall not be discharged or fully bonded and there 
shall have been a period of 60 days after the date on which any period for  
appeal has expired and during which a stay of enforcement of such           
judgement, order or decree shall not be in effect; or                       

(vi) certain events of bankruptcy, insolvency or reorganization with    
respect to the Company or any Significant Subsidiary of the Company shall   
have occurred.                                                              

If an event of default (other than as specified in clause (vi) above) shall 
occur and be continuing, the trustee, by notice to the Company, or the holders  
of at least 25% in aggregate principal amount of the Convertible Notes then     
outstanding, by notice to the trustee and the Company, may declare the          
principal of, premium, if any, and accrued and unpaid interest, if any, on all  
of the outstanding Convertible Notes due and payable immediately, upon which    
declaration, all amounts payable in respect of the Convertible Notes shall be   
immediately due and payable. If an event of default specified in clause (vi)    
above occurs and is continuing, then the principal of, premium, if any, and     
accrued and unpaid interest, if any, on all of the outstanding Convertible      
Notes shall ipso facto become and be immediately due and payable without any    
declaration or other act on the part of the trustee or any holder of the        
Convertible Notes.                                                              

Change of Control; Sale of Assets. In the event of a Change of Control (as  
defined in the Convertible Note Indenture), the holder of a Convertible Note    
will have the right to require the Company to repurchase such holder's          
Convertible Notes at 101.0% of the principal amount thereof plus accrued and    
unpaid interest to the repurchase date. In addition, the Company will be        
obligated to make an offer to repurchase the Convertible Notes for cash at a    
price equal to 100.0% of the principal amount thereof plus accrued and unpaid   
interest, if any, to the date of repurchase with the net cash proceeds of       
certain asset sales.                                                            

Registration Rights. Holders of the Convertible Notes have certain resale   
registration rights with respect to the Common Stock issuable upon conversion   
of the Convertible Notes. The Company has agreed to file with the Commission a  
registration statement on Form S-1 or Form S-3, if the use of that form is      
then available, to cover resales of Common Stock issuable upon conversion of    
the Convertible Notes. The Company will be permitted to prohibit offers and     
sales of Common Stock issuable upon conversion of the Convertible Notes         
pursuant to the shelf registration under certain circumstances and subject to   
certain conditions. Telegroup has agreed to maintain the shelf registration     
until the first to occur of (i) the second anniversary of the issue date of     
the Convertible Notes or (ii) the day when no security covered by the shelf     
registration remains a Transfer Restricted Security (as defined).               

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DESCRIPTION OF OTHER INDEBTEDNESS 

SENIOR DISCOUNT NOTES                                                           

The Senior Discount Notes were issued under an Indenture dated October 23,  
1997. The terms of the Notes include those stated in the Indenture and those    
made part of the Indenture by reference to the Trust Indenture Act of 1939, as  
amended (the "Trust Indenture Act"), as in effect on the date of the            
Indenture. The following summary of the material provisions of the Notes does   
not purport to be complete and is subject to, and qualified in its entirety by  
reference to, the provisions of the Indenture (a copy of which is available,    
upon request, from the Company), including the definitions of certain terms     
contained therein and those terms made part of the Indenture by reference to    
the Trust Indenture Act, as in effect on the date of the Indenture. The         
definitions of certain capitalized terms used in the following summary are set  
forth below under "--Certain Definitions." For purposes of this description of  
the Senior Discount Notes, the "Company" means Telegroup, Inc. and excludes     
its Subsidiaries.                                                               

GENERAL                                                                     

The Senior Discount Notes are unsecured unsubordinated obligations of the   
Company. The Senior Discount Notes will rank senior to all existing and future  
subordinated Indebtedness of the Company, and pari passu with all unsecured     
Indebtedness of the Company which is not by its terms expressly subordinated    
to the Senior Discount Notes. As of September 30, 1997, after giving pro forma  
effect to the offering of the Old and the transactions described herein, the    
Company would have had $25.0 million of Indebtedness outstanding ranking        
subordinate to the Senior Discount Notes. The Senior Discount Notes will be     
effectively subordinated to all secured Indebtedness of the Company to the      
extent of the value of the assets securing such Indebtedness.                   

The Senior Discount Notes will be issued only in registered form, without   
coupons, in principal denominations of $1,000 and integral multiples thereof.   
Principal of, premium, if any, and interest on the Senior Discount Notes will   
be payable, and the Senior Discount Notes will be transferable, at the office   
of the Company's agent in the City of New York located at the corporate trust   
office of the Trustee. In addition, cash interest may be paid at the option of  
the Company, by check mailed to the person entitled thereto as shown on the     
security register. No service charge will be made for any transfer, exchange    
or redemption of Senior Discount Notes, except in certain circumstances for     
any tax or other governmental charge that may be imposed in connection          
therewith. Initially, the Trustee will act as paying agent and registrar for    
the Senior Discount Notes. The Company may change any paying agent and          
registrar without notice to the holders.                                        

MATURITY, INTEREST AND PRINCIPAL                                            

The Senior Discount Notes are limited to an aggregate principal amount at   
maturity of $150,000,000 and will mature on November 1, 2004. Cash interest on  
the Senior Discount Notes will neither accrue nor be payable prior to May 1,    
2000. Thereafter, cash interest will accrue at a rate of 10 1/2% per annum and  
will be payable semi-annually on each May 1, and November 1, commencing on      
November 1, 2000, to the persons who are registered Noteholders at the close    
of business on the April 15 and October 15 immediately preceding the            
applicable interest payment date. Interest will be computed on the basis of a   
360-day year comprised of twelve 30-day months.                                 

The Senior Discount Notes will not be entitled to the benefit of any        
mandatory sinking fund.                                                         

OPTIONAL REDEMPTION                                                         

The Indenture will provide that the Senior Discount Notes will not be       
redeemable prior to November 1, 2001. On and after November 1, 2001 the Senior  
Discount Notes will be redeemable, at the option of the Company, in whole or    
in part, on not less than 30 nor more than 60 days' prior notice, at the        
redemption prices (expressed as percentages of the principal amount) set forth  
below, plus accrued and unpaid interest, if any, to                             

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the redemption date if redeemed during the 12-month period beginning on         
November 1 of the years indicated below:                                        

                                                                [Download Table]

YEAR                                                             PERCENTAGE
----                                                             ----------
                                                                           
2001............................................................  105.25%  
2002............................................................  103.50%  
2003............................................................  101.75%  

The Indenture will provide that in the event that on or prior to November 1,
2000, the Company consummates one or more public offerings of its Common        
Stock, the Company may, at its option, redeem from the net proceeds of such     
public offerings of the Company's Common Stock no later than 60 days following  
the consummation of such offerings up to 33% of the aggregate principal amount  
at maturity of the Senior Discount Notes originally issued at a redemption      
price equal to 110.5% of the Accreted Value on the date of redemption of the    
Senior Discount Notes so redeemed plus accrued and unpaid interest, if any;     
provided, however, that immediately after giving effect to any such             
redemption, not less than 66.0% of the aggregate principal amount at maturity   
of the Senior Discount Notes originally issued remains outstanding.             

CHANGE OF CONTROL                                                           

Upon the occurrence of a Change of Control, the Company shall be obligated  
to make an offer to purchase (a "Change of Control Offer"), and shall           
purchase, on a business day (the "Change of Control Purchase Date") not more    
than 60 nor less than 30 days following the occurrence of the Change of         
Control, all of the then outstanding Senior Discount Notes at a purchase price  
(the "Change of Control Purchase Price") equal to 101% of the Accreted Value    
thereof on the Change of Control Purchase Date plus accrued and unpaid          
interest, if any, to the Change of Control Purchase Date. The Company shall be  
required to purchase all Senior Discount Notes properly tendered into the       
Change of Control Offer and not withdrawn. The Change of Control Offer is       
required to remain open for at least 20 business days and until the close of    
business on the Change of Control Purchase Date.                                

In order to effect such Change of Control Offer, the Company shall, not     
later than the 30th day after the occurrence of the Change of Control, mail to  
each holder of Senior Discount Notes notice of the Change of Control Offer,     
which notice shall govern the terms of the Change of Control Offer and shall    
state, among other things, the procedures that holders of Senior Discount       
Notes must follow to accept the Change of Control Offer.                        

The Company shall not be required to make a Change of Control Offer upon a  
Change of Control if a third party makes the Change of Control Offer in the     
manner, at the times and otherwise in compliance with the requirements          
applicable to a Change of Control Offer made by the Company and purchases all   
Senior Discount Notes validly tendered and not withdrawn under such Change of   
Control Offer.                                                                  

The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and          
regulations are applicable, in the event that a Change of Control occurs and    
the Company is required to purchase Senior Discount Notes as described above.   

SELECTION AND NOTICE                                                        

The Indenture will provide that in the event that less than all of the      
Senior Discount Notes are to be redeemed at any time, selection of such Senior  
Discount Notes for redemption will be made by the Trustee pro rata, by a lot    
or by such method as the Trustee shall deem fair and appropriate. No Senior     
Discount Notes of a principal amount of $1,000 or less shall be redeemed in     
part. Notice of redemption shall be mailed by first-class mail at least 30 but  
not more than 60 days before the redemption date to each holder of Senior       
Discount Notes to be redeemed at its registered address. If any Note is to be   
redeemed in part only, the notice of redemption that relates to such Note       
shall state the portion of the principal amount thereof to be redeemed. A new   
Note in a principal amount equal to the unredeemed portion thereof will be      
issued in the name of the Noteholder thereof                                    

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upon surrender for cancellation of the original Note. On and after the          
redemption date, interest will cease to accrue and original issue discount      
will cease to accrete, as the case may be, on Senior Discount Notes or          
portions thereof called for redemption, unless the Company defaults in the      
payment of the redemption price therefor.                                       

CERTAIN COVENANTS                                                           

The Indenture will contain the following covenants, among others:           

Limitation on Indebtedness. The Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,      
guarantee or in any manner become directly or indirectly liable, contingently   
or otherwise, for the payment of (in each case, to "incur") any Indebtedness    
(including, without limitation, any Acquired Indebtedness); provided, however,  
that the Company will be permitted to incur Indebtedness (including, without    
limitation, Acquired Indebtedness) and any Subsidiary will be permitted to      
incur Acquired Indebtedness, if immediately thereafter the ratio of (i) the     
aggregate principal amount (or accreted value, as the case may be) of           
Indebtedness of the Company and its Subsidiaries on a consolidated basis        
outstanding as of the Transaction Date to (ii) the Pro Forma Consolidated Cash  
Flow for the preceding two fiscal quarters multiplied by two, determined on a   
pro forma basis as if any such Indebtedness had been incurred and the proceeds  
thereof had been applied at the beginning of such two fiscal quarters, would    
be greater than zero and less than 5.0 to 1.                                    

Notwithstanding the foregoing, the Company and its Subsidiaries may, to the 
extent specifically set forth below, incur each and all of the following (each  
of which will be given independent effect):                                     

(a) Indebtedness of the Company evidenced by the Senior Discount Notes  
and issued on the Issue Date;                                               

(b) Indebtedness of the Company and its Subsidiaries outstanding on the 
Issue Date;                                                                 

(c) Indebtedness, including Acquired Indebtedness, in an aggregate      
principal amount at any one time outstanding not to exceed $25 million;     

(d) Indebtedness (other than Acquired Indebtedness) incurred to finance 
the cost (including the cost of design, development, construction,          
acquisition, installation or integration) of equipment used in the          
telecommunications business or ownership rights with respect to             
indefeasible rights of use or minimum investment units (or similar          
ownership interests) in transnational fiber optic cable or other            
transmission facilities, in each case purchased or leased by the Company or 
a Subsidiary after the Issue Date;                                          

(e) Indebtedness of the Company or any Subsidiary (A) in respect of     
performance, surety or appeal bonds or letters of credit supporting trade   
payables, in each case provided in the ordinary course of business, (B)     
under Currency Agreements and Interest Rate Protection Agreements; provided 
that such agreements do not increase the Indebtedness of the obligor        
outstanding at any time other than as a result of fluctuations in foreign   
currency exchange rates or interest rates or by reason of fees, indemnities 
and compensation payable thereunder; and (C) arising from agreements        
providing for indemnification, adjustment of purchase price or similar      
obligations, or from guarantees or letters of credit, surety bonds or       
performance bonds securing any obligations of the Company or any of its     
Subsidiaries pursuant to such agreements, in any case incurred in           
connection with the disposition of any business, assets or Subsidiary of    
the Company (other than guarantees of Indebtedness incurred by any Person   
acquiring all or any portion of such business, assets or Subsidiary for the 
purpose of financing such acquisition), in a principal amount not to exceed 
the gross proceeds actually received by the Company or any Subsidiary in    
connection with such disposition;                                           

(f) Indebtedness of a Wholly-Owned Subsidiary owed to and held by the   
Company or another Wholly-Owned Subsidiary, in each case which is not       
subordinated in right of payment to any Indebtedness of such Wholly-Owned   
Subsidiary, except that any transfer of such Indebtedness by the Company or 
a Wholly-Owned Subsidiary (other than to the Company or to a Wholly-Owned   
Subsidiary) or any event which results in any such Wholly-Owned Subsidiary  
ceasing to be a Wholly-Owned Subsidiary shall, in each case, be an          
incurrence of Indebtedness by such Wholly-Owned Subsidiary subject to the   
other provisions of this covenant;                                          

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(g) Indebtedness of the Company owed to and held by a Wholly-Owned      
Subsidiary of the Company which is unsecured and subordinated in right of   
payment to the payment and performance of the Company's obligations under   
the Indenture and the Senior Discount Notes except that any transfer of     
such Indebtedness by a Wholly-Owned Subsidiary of the Company (other than   
to another Wholly-Owned Subsidiary of the Company) or any event which       
results in any such Wholly-Owned Subsidiary ceasing to be a Wholly-Owned    
Subsidiary shall, in each case, be an incurrence of Indebtedness by the     
Company subject to the other provisions of this covenant;                   

(h) Indebtedness of (x) the Company not to exceed, at any one time      
outstanding, 1.75 times the net cash proceeds (less the amount of such      
proceeds applied as provided in clause (ii) or (iii) of the second          
paragraph of the "Limitation on Restricted Payments" covenant) received by  
the Company after the Issue Date from the issuance and sale of its Common   
Stock to a Person that is not a Subsidiary of the Company and (y) the       
Company or Acquired Indebtedness of a Subsidiary not to exceed, at one time 
outstanding, 1.5 times the Fair Market Value of any Common Stock of the     
Company issued after the Issue Date as consideration for an Asset           
Acquisition in the Company's line of business; provided that, in any such   
case, such Indebtedness (other than Acquired Indebtedness) matures after    
the Stated Maturity of the Senior Discount Notes and has an Average Life to 
Stated Maturity longer than the Senior Discount Notes;                      

(i) Indebtedness of the Company, to the extent that the net proceeds    
thereof are promptly (A) used to repurchase Senior Discount Notes tendered  
in an Change of Control Offer or (B) deposited to defease all of the Senior 
Discount Notes as described below under "Defeasance or Covenant Defeasance  
of Indenture";                                                              

 (j) Indebtedness of a Subsidiary represented by a guarantee of the Senior
Discount Notes permitted by and made in accordance with the "Limitation on  
Issuances of Guarantees of Indebtedness by Subsidiaries" covenant;          

(k) Indebtedness of the Company or any Subsidiary under one or more     
Credit Facilities, provided that if any Indebtedness is incurred pursuant   
to this clause (k), total Indebtedness under this clause (k) and clause (c) 
above does not exceed at any one time outstanding an amount equal to the    
sum of (x) 65% of Eligible Accounts receivable and (y) without duplication  
of amounts included in the previous clause (x), 30% of the Company's        
unbilled, domestic unencumbered accounts receivable; and                    

 (l) (i) Indebtedness of the Company the proceeds of which are used solely
to refinance (whether by amendment, renewal, extension or refunding)        
Indebtedness of the Company or any of its Subsidiaries and (ii)             
Indebtedness of any Subsidiary of the Company the proceeds of which are     
used solely to refinance (whether by amendment, renewal, extension or       
refunding) Indebtedness of such Subsidiary, in each case other than the     
Indebtedness incurred under clause (c) through (k) of this covenant (which  
clauses provide for the refinancing of Indebtedness incurred thereunder);   
provided, however, that (x) the principal amount of Indebtedness incurred   
pursuant to this clause (l) (or, if such Indebtedness provides for an       
amount less than the principal amount thereof to be due and payable upon a  
declaration of acceleration of the maturity thereof, the original issue     
price of such Indebtedness) shall not exceed the sum of the principal       
amount of Indebtedness so refinanced, plus the amount of any premium        
required to be paid in connection with such refinancing pursuant to the     
terms of such Indebtedness or the amount of any premium reasonably          
determined by the Board of Directors of the Company as necessary to         
accomplish such refinancing by means of a tender offer or privately         
negotiated purchase, plus the amount of expenses in connection therewith,   
(y) in the case of Indebtedness incurred by the Company pursuant to this    
clause (l) to refinance Subordinated Indebtedness, such Indebtedness (A)    
has an Average Life to Stated Maturity greater than the remaining Average   
Life to Stated Maturity of the Indebtedness being refinanced and (B) is     
expressly subordinated to the Senior Discount Notes in the same manner and  
to the same extent that the Subordinated Indebtedness being refinanced is   
subordinated to the Senior Discount Notes and (z) in the case of            
Indebtedness incurred by the Company pursuant to this clause (l) to         
refinance Pari Passu Indebtedness, such Indebtedness (A) has an Average     
Life to Stated Maturity greater than the remaining Average Life to Stated   
Maturity of the Indebtedness being refinanced and (B) constitutes Pari      
Passu Indebtedness or Subordinated Indebtedness.                            

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For purposes of determining any particular amount of Indebtedness under this
"Limitation on Indebtedness" covenant, guarantees, Liens or obligations with    
respect to letters of credit supporting Indebtedness otherwise included in the  
determination of such particular amount shall not be included. For purposes of  
determining compliance with this "Limitation on Indebtedness" covenant, (A) in  
the event that an item of Indebtedness meets the criteria of more than one of   
the types of Indebtedness described in the above clauses, the Company, in its   
sole discretion, shall classify such item of Indebtedness and only be required  
to include the amount and type of such Indebtedness in one of such clauses and  
(B) the principal amount of Indebtedness issued at a price that is less than    
the principal amount thereof shall be equal to the amount of the liability in   
respect thereof determined in conformity with GAAP.                             

Limitation on Restricted Payments. The Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly:                             

 (a) declare or pay any dividend or make any other distribution or payment
on or in respect of Capital Stock of the Company or any of its Subsidiaries 
or any payment made to the direct or indirect holders (in their capacities  
as such) of Capital Stock of the Company or any of its Subsidiaries (other  
than (x) dividends or distributions payable solely in Capital Stock of the  
Company (other than Redeemable Capital Stock) or in options, warrants or    
other rights to purchase Capital Stock of the Company (other than           
Redeemable Capital Stock), (y) the declaration or payment of dividends or   
other distributions to the extent declared or paid to the Company or any    
Subsidiary of the Company and (z) the declaration or payment of dividends   
or other distributions by any Subsidiary of the Company to all holders of   
Common Stock of such Subsidiary on a pro rata basis),                       

(b) purchase, redeem, defease or otherwise acquire or retire for value  
any Capital Stock of the Company or any of its Subsidiaries (other than any 
such Capital Stock owned by a Wholly-Owned Subsidiary of the Company),      

(c) make any principal payment on, or purchase, defease, repurchase,    
redeem or otherwise acquire or retire for value, prior to any scheduled     
maturity, scheduled repayment, scheduled sinking fund payment or other      
Stated Maturity, any Subordinated Indebtedness (other than any such         
Indebtedness owned by the Company or a Wholly-Owned Subsidiary of the       
Company), or                                                                

(d) make any Investment (other than any Permitted Investment) in any    
person (such payments or Investments described in the preceding clauses     
(a), (b), (c) and (d) are collectively referred to as "Restricted           
Payments"), unless, at the time of and after giving effect to the proposed  
Restricted Payment (the amount of any such Restricted Payment, if other     
than cash, shall be the Fair Market Value on the date of such Restricted    
Payment of the asset(s) proposed to be transferred by the Company or such   
Subsidiary, as the case may be, pursuant to such Restricted Payment), (A)   
no Default or Event of Default shall have occurred and be continuing, (B)   
immediately prior to and after giving effect to such Restricted Payment,    
the Company would be able to incur $1.00 of additional Indebtedness         
pursuant to the first paragraph of the covenant described under "--         
Limitation on Indebtedness" above (assuming a market rate of interest with  
respect to such additional Indebtedness) and (C) the aggregate amount of    
all Restricted Payments declared or made from and after the Issue Date      
would not exceed the sum of (1) the remainder of (a) 100% of the aggregate  
amount of the Consolidated Cash Flow accrued on a cumulative basis during   
the period (taken as one accounting period) beginning on the first day of   
the last fiscal quarter immediately preceding the Issue Date and ending on  
the last day of the last fiscal quarter preceding the date of such proposed 
Restricted Payment minus (b) the product of 2.00 times cumulative           
Consolidated Fixed Charges accrued on a cumulative basis during the period  
(taken as one accounting period) beginning on the first day of the last     
fiscal quarter immediately preceding the Issue Date and ending on the last  
day of the last fiscal quarter preceding the date of such proposed          
Restricted Payment plus (2) the aggregate net cash proceeds received by the 
Company after the Issue Date from the issuance and sale permitted by the    
Indenture of its Capital Stock (other than Redeemable Capital Stock) to a   
Person who is not a Subsidiary of the Company (except to the extent such    
net cash proceeds are used to incur new Indebtedness outstanding pursuant   
to clause (h) of the second paragraph of the "Limitation on Indebtedness"   
Covenant) plus (3) the aggregate net cash proceeds received                 

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after the Issue Date by the Company from the issuance or sale of debt       
securities that have been converted into or exchanged for Capital Stock of  
the Company (other than Redeemable Capital Stock) together with the         
aggregate cash received by the Company at the time of such conversion or    
exchange plus (4) without duplication of any amount included in the         
calculation of Consolidated Cash Flow, in the case of repayment of, or      
return of capital in respect of, any Investment constituting a Restricted   
Payment made after the Issue Date, an amount equal to the lesser of the     
return of capital with respect to such Investment and the cost of such      
Investment, in either case less the cost of the disposition of such         
Investment.                                                                 

None of the foregoing provisions will prohibit (i) the payment of any       
dividend within 60 days after the date of its declaration, if at the date of    
declaration such payment would be permitted by the foregoing paragraph; (ii)    
so long as no Default or Event of Default shall have occurred and be            
continuing, the redemption, repurchase or other acquisition or retirement of    
any shares of any class of Capital Stock of the Company or any Subsidiary of    
the Company in exchange for, or out of the net cash proceeds of, a              
substantially concurrent (x) capital contribution to the Company from any       
person (other than a Subsidiary of the Company) or (y) issue and sale of other  
shares of Capital Stock (other than Redeemable Capital Stock) of the Company    
to any person (other than to a Subsidiary of the Company); provided, however,   
that the amount of any such net cash proceeds that are utilized for any such    
redemption, repurchase or other acquisition or retirement shall be excluded     
from clause (C)(2) and (3) of the preceding paragraph; (iii) so long as no      
Default or Event of Default shall have occurred and be continuing, any          
redemption, repurchase or other acquisition or retirement of Subordinated       
Indebtedness by exchange for, or out of the net cash proceeds of, a             
substantially concurrent (x) capital contribution to the Company from any       
person (other than a Subsidiary of the Company) or (y) issue and sale of (1)    
Capital Stock (other than Redeemable Capital Stock) of the Company to any       
person (other than to a Subsidiary of the Company); provided, however, that     
the amount of any such net cash proceeds that are utilized for any such         
redemption, repurchase or other acquisition or retirement shall be excluded     
from clause (C)(2) and (3) of the preceding paragraph; or (2) Indebtedness of   
the Company issued to any person (other than a Subsidiary of the Company), so   
long as such Indebtedness is Subordinated Indebtedness which (x) has no Stated  
Maturity earlier than the 91st day after the Final Maturity Date of the Senior  
Discount Notes, (y) has an Average Life to Stated Maturity equal to or greater  
than the remaining Average Life to Stated Maturity of the Senior Discount       
Notes and (z) is subordinated to the Senior Discount Notes in the same manner   
and at least to the same extent as the Subordinated Indebtedness so purchased,  
exchanged, redeemed, acquired or retired; (iv) Investments constituting         
Restricted Payments made as a result of the receipt of non-cash consideration   
from any Asset Sale made pursuant to and in compliance with the covenant        
described under "--Disposition of Proceeds of Asset Sales" below; (v) so long   
as no Default or Event of Default has occurred and is continuing, repurchases   
by the Company of Common Stock of the Company from employees of the Company or  
any of its Subsidiaries or their authorized representatives upon the death,     
disability or termination of employment of such employees, in an aggregate      
amount not exceeding $1,000,000 in any calendar year; (vi) Investments in       
persons other than Subsidiaries at any one time outstanding (measured on the    
date each such Investment was made without giving effect to subsequent changes  
in value) not to exceed $20 million in the aggregate provided that such         
persons primary business is related, ancillary or complementary to the          
business of the Company and its Subsidiaries on the date of such Investment;    
and (vii) Investments in any person at any one time outstanding (measured on    
the date each such Investment was made without giving effect to subsequent      
changes in value) in an aggregate amount not to exceed 5.0% of the Company's    
total consolidated assets. In computing the amount of Restricted Payments       
previously made for purposes of clause (C) of the preceding paragraph,          
Restricted Payments made under the preceding clauses (v), (vi) and (vii) shall  
be included and clauses (i), (ii), (iii) and (iv) shall not be so included.     

Limitation on Liens. The Company will not, and will not permit any of its   
Subsidiaries to, create, incur, assume or suffer to exist any Liens of any      
kind against or upon any of its property or assets, or any proceeds therefrom,  
unless (x) in the case of Liens securing Subordinated Indebtedness, the Senior  
Discount Notes are secured by a Lien on such property, assets or proceeds that  
is senior in priority to such Liens and (y) in all other cases, the Senior      
Discount Notes are equally and ratably secured, except for (a) Liens existing   
as of the Issue Date; (b) Liens securing the Senior Discount Notes; (c) Liens   
securing Indebtedness under Credit Facilities incurred in compliance with       
clauses (k) and (c) of the second paragraph of the "Limitation on               
Indebtedness"                                                                   

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covenant; (d) Liens on the Company's headquarters and other business premises   
securing Indebtedness in an aggregate principal amount not to exceed $10        
million; (e) Liens in favor of the Company or any Subsidiary; (f) Liens         
securing Indebtedness which is incurred to refinance Indebtedness which has     
been secured by a Lien permitted under the Indenture and which has been         
incurred in accordance with the provisions of the Indenture; provided,          
however, that such Liens do not extend to or cover any property or assets of    
the Company or any of its Subsidiaries not securing the Indebtedness so         
refinanced; and (g) Permitted Liens.                                            

Disposition of Proceeds of Asset Sales. The Company will not, and will not  
permit any of its Subsidiaries to, make any Asset Sale unless (a) the Company   
or such Subsidiary, as the case may be, receives consideration at the time of   
such Asset Sale at least equal to the Fair Market Value of the shares or        
assets sold or otherwise disposed of and (b) at least 80% of such               
consideration consists of cash or Cash Equivalents. To the extent the Net Cash  
Proceeds of any Asset Sale are not used to permanently repay unsubordinated     
Indebtedness of the Company or Indebtedness of any Subsidiary, in each case     
owing to a person other than the Company or any of its Subsidiaries, the        
Company or such Subsidiary, as the case may be, may, within 180 days of such    
Asset Sale, apply such Net Cash Proceeds to an investment in properties and     
assets that replace the properties and assets that were the subject of such     
Asset Sale or in properties and assets that will be used in the business of     
the Company and its Subsidiaries existing on the Issue Date or in businesses    
reasonably related thereto ("Replacement Assets"). Any Net Cash Proceeds from   
any Asset Sale that are neither used to repay, and permanently reduce any       
commitments under such unsubordinated Indebtedness of the Company or            
Indebtedness of a Subsidiary nor invested in Replacement Assets within the 180  
period described above constitute "Excess Proceeds" subject to disposition as   
provided below.                                                                 

When the aggregate amount of Excess Proceeds equals or exceeds $10,000,000, 
the Company shall make an offer to purchase (an "Asset Sale Offer"), from all   
holders of the Senior Discount Notes, not more than 40 Business Days            
thereafter, an aggregate principal amount of Senior Discount Notes equal to     
such Excess Proceeds, at a price in cash equal to 100% of the outstanding       
principal amount thereof plus accrued and unpaid interest, if any, to the       
purchase date. To the extent that the aggregate principal amount of Senior      
Discount Notes tendered pursuant to an Asset Sale Offer is less than the        
Excess Proceeds, the Company may use such deficiency for general corporate      
purposes. If the aggregate principal amount of Senior Discount Notes validly    
tendered and not withdrawn by holders thereof exceeds the Excess Proceeds,      
Senior Discount Notes to be purchased will be selected on a pro rata basis.     
Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall   
be reset to zero.                                                               

The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and          
regulations are applicable, in the event that an Asset Sale occurs and the      
Company is required to purchase Senior Discount Notes as described above.       

Limitation on Issuances and Sale of Preferred Stock by Subsidiaries. The    
Company (a) will not permit any of its Subsidiaries to issue any Preferred      
Stock (other than to the Company or a Wholly-Owned Subsidiary of the Company)   
and (b) will not permit any person (other than the Company or a Wholly-Owned    
Subsidiary of the Company) to own any Preferred Stock of any Subsidiary of the  
Company; provided, however, that this covenant shall not prohibit the issuance  
and sale of (x) all, but not less than all, of the issued and outstanding       
Capital Stock of any Subsidiary of the Company owned by the Company or any of   
its Subsidiaries in compliance with the other provisions of the Indenture or    
(y) directors' qualifying shares or investments by foreign nationals mandated   
by applicable law.                                                              

Limitation on Issuances of Guarantees of Indebtedness by Subsidiaries. The  
Company will not permit any Subsidiary, directly or indirectly, to guarantee,   
assume or in any other manner become liable with respect to any Indebtedness    
of the Company, other than Indebtedness under Credit Facilities incurred under  
clauses (c) and (l) in the "Limitation on Indebtedness" covenant, unless (i)    
such Subsidiary simultaneously executes and delivers a supplemental indenture   
to the Indenture providing for a guarantee of the Senior Discount Notes on      
terms substantially similar to the guarantee of such Indebtedness, except that  
if such Indebtedness is by its express terms subordinated in right of payment   
to the Senior Discount Notes, any such assumption, guarantee or other           

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liability of such Subsidiary with respect to such Indebtedness shall be         
subordinated in right of payment to such Subsidiary's assumption, guarantee or  
other liability with respect to the Senior Discount Notes substantially to the  
same extent as such Indebtedness is subordinated to the Senior Discount Notes   
and (ii) such Subsidiary waives, and will not in any manner whatsoever claim    
or take the benefit or advantage of, any rights of reimbursement, indemnity or  
subrogation or any rights against the Company or any other Subsidiary as a      
result of any payment by such Subsidiary under its guarantee.                   

Notwithstanding the foregoing, any guarantee by a Subsidiary may provide by 
its terms that it will be automatically and unconditionally released and        
discharged upon (i) any sale, exchange or transfer, to any person not an        
Affiliate of the Company, of all of the Company's and each Subsidiary's         
Capital Stock in, or all or substantially all of the assets of, such            
Subsidiary (which sale, exchange or transfer is not prohibited by the           
Indenture) or (ii) the release or discharge of the guarantee, which resulted    
in the creation of such guarantee of the Senior Discount Notes, except a        
discharge or release by or as a result of payment under such guarantee.         

Limitation on Transactions with Interested Persons. The Company will not,   
and will not permit any of its Subsidiaries to, directly or indirectly, enter   
into or suffer to exist any transaction or series of related transactions       
(including, without limitation, the sale, transfer, disposition, purchase,      
exchange or lease of assets, property or services) with, or for the benefit     
of, any Affiliate of the Company or any beneficial owner (determined in         
accordance with the Indenture) of 5% or more of the Company's Common Stock at   
any time outstanding ("Interested Persons"), unless (a) such transaction or     
series of related transactions is on terms that are no less favorable to the    
Company or such Subsidiary, as the case may be, than those which could have     
been obtained in a comparable transaction at such time from persons who are     
not Affiliates of the Company or Interested Persons, (b) with respect to a      
transaction or series of transactions involving aggregate payments or value     
equal to or greater than $10,000,000, the Company has obtained a written        
opinion from an Independent Financial Advisor stating that the terms of such    
transaction or series of transactions are fair to the Company or its            
Subsidiary, as the case may be, from a financial point of view and (c) with     
respect to a transaction or series of transactions involving aggregate          
payments or value equal to or greater than $2,000,000, the Company shall have   
delivered an officer's certificate to the Trustee certifying that such          
transaction or series of transactions complies with the preceding clause (a)    
and, if applicable, certifying that the opinion referred to in the preceding    
clause (b) has been delivered and that such transaction or series of            
transactions has been approved by a majority of the disinterested members of    
the Board of Directors of the Company; provided, however, that this covenant    
will not restrict the Company or any Subsidiary from (i) making any payment     
permitted under the covenant described under "--Limitation on Restricted        
Payments" above, (ii) paying reasonable and customary fees to directors of the  
Company who are not employees of the Company, (iii) making loans or advances    
to officers, employees or consultants of the Company and its Subsidiaries       
(including travel and moving expenses) in the ordinary course of business for   
bona fide business purposes of the Company or such Subsidiary not in excess of  
$2,000,000 in the aggregate at any one time outstanding, (iv) entering into     
any transaction between the Company and any of its Subsidiaries or between      
Subsidiaries or (v) compensation arrangements with the Company's executive      
officers.                                                                       

Limitation on Dividends and Other Payment Restrictions Affecting            
Subsidiaries. The Company will not, and will not permit any of its              
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer    
to exist or become effective any encumbrance or restriction on the ability of   
any Subsidiary of the Company to (a) pay dividends, in cash or otherwise, or    
make any other distributions on or in respect of its Capital Stock or any       
other interest or participation in, or measured by, its profits, (b) pay any    
Indebtedness owed to the Company or any other Subsidiary of the Company, (c)    
make loans or advances to, or any Investment in, the Company or any other       
Subsidiary of the Company, (d) transfer any of its properties or assets to the  
Company or any other Subsidiary of the Company or (e) guarantee any             
Indebtedness of the Company or any other Subsidiary of the Company, except for  
such encumbrances or restrictions existing under or by reason of (i)            
applicable law, (ii) customary non-assignment provisions of any contract or     
any lease governing a leasehold interest of the Company or any Subsidiary of    
the Company, (iii) customary restrictions on transfers of property subject to   
a Lien permitted under the Indenture, (iv) any agreement or other instrument    
of a person acquired by the Company or any Subsidiary of the Company (or a      
Subsidiary of such person) in existence at the time of such acquisition (but    
not                                                                             

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created in contemplation thereof), which encumbrance or restriction is not      
applicable to any person, or the properties or assets of any person, other      
than the person, or the properties or assets of the person, so acquired, (v)    
provisions contained in agreements or instruments relating to Indebtedness      
which prohibit the transfer of all or substantially all of the assets of the    
obligor thereunder unless the transferee shall assume the obligations of the    
obligor under such agreement or instrument, (vi) any such encumbrance or        
restriction existing on the Issue Date in the Indenture or any other            
agreements in effect on the Issue Date, and any extensions, refinancings,       
renewals or replacements of such agreements; provided that the encumbrances     
and restrictions in any such extensions, refinancings, renewals or              
replacements are no less favorable in any material respect to the holders than  
those encumbrances or restrictions that are then in effect and that are being   
extended, refinanced, renewed or replaced; and (vii) contained in the terms of  
any Indebtedness or any agreement pursuant to which such Indebtedness was       
issued if the encumbrance or restriction applies only in the event of a         
default with respect to a financial covenant contained in such Indebtedness or  
agreement and such encumbrance or restriction is not materially more            
disadvantageous to the holders of the Senior Discount Notes than is customary   
in comparable financing (as determined by the Company) and the Company          
determines that any such encumbrance or restriction will not materially affect  
the Company's ability to make principal or interest payments on the Senior      
Discount Notes. Nothing contained in this "Limitation on Dividend and Other     
Payment Restrictions Affecting Subsidiaries" covenant shall prevent the         
Company or any Subsidiary from (1) creating, incurring, assuming or suffering   
to exist any Liens otherwise permitted in the "Limitation on Liens" covenant    
or (2) restricting the sale or other disposition of property or assets of the   
Company or any of its Subsidiaries that secure Indebtedness of the Company or   
any of its Subsidiaries.                                                        

Limitation on Sale and Leaseback Transactions. Neither the Company nor any  
Subsidiary will, directly or indirectly, enter into any Sale and Leaseback      
Transaction, except that the Company or any Subsidiary may enter into a Sale    
and Leaseback Transaction if (x) the aggregate Fair Market Value of all Sale    
and Leaseback Transactions entered into by the Company and its Subsidiaries     
after the Issue Date shall not involve property or assets having an aggregate   
Fair Market Value of more than $20 million or (y) (i) immediately prior         
thereto, and after giving effect to such Sale and Leaseback Transaction (the    
Indebtedness thereunder being equivalent to the attributable Value thereof)     
the Company could incur at least $1.00 of additional Indebtedness pursuant to   
the first paragraph of the covenant described under "--Limitation on            
Indebtedness" above and (ii) the Sale and Leaseback Transaction constitutes an  
Asset Sale effected in accordance with the requirements of the covenant         
described under "--Disposition of Proceeds of Asset Sales" above.               

Reporting Requirements. The Company will file with the Commission the annual
reports, quarterly reports and other documents required to be filed with the    
Commission pursuant to Sections 13 and 15 of the Exchange Act, whether or not   
the Company has a class of securities registered under the Exchange Act. The    
Company will be required to file with the Trustee and provide to each           
Noteholder within 15 days after it files them with the Commission (or if any    
such filing is not permitted under the Exchange Act, 15 days after the Company  
would have been required to make such filing) copies of such reports and        
documents.                                                                      

MERGER, SALE OF ASSETS, ETC.                                                

The Company will not, in any transaction or series of transactions, merge or
consolidate with or into, or sell, assign, convey, transfer, lease or           
otherwise dispose of all or substantially all of its properties and assets as   
an entirety to, any person or persons, and the Company will not permit any of   
its Subsidiaries to enter into any such transaction or series of transactions   
if such transaction or series of transactions, in the aggregate, would result   
in a sale, assignment, conveyance, transfer, lease or other disposition of all  
or substantially all of the properties and assets of the Company or the         
Company and its Subsidiaries, taken as a whole, to any other person or          
persons, unless at the time of and after giving effect thereto (a) either (i)   
if the transaction or series of transactions is a merger or consolidation, the  
Company shall be the surviving person of such merger or consolidation, or (ii)  
the person formed by such consolidation or into which the Company or such       
Subsidiary is merged or to which the properties and assets of the Company or    
such Subsidiary, as the case may be, are transferred (any such surviving        
person or transferee person being the "Surviving Entity") shall be a            
corporation organized and existing under the laws of the United States of       
America, any state thereof or the District of                                   

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Columbia and shall expressly assume by a supplemental indenture executed and    
delivered to the Trustee, in form reasonably satisfactory to the Trustee, all   
the obligations of the Company under the Senior Discount Notes and the          
Indenture, and in each case, the Indenture shall remain in full force and       
effect; (b) immediately before and immediately after giving effect to such      
transaction or series of transactions on a pro forma basis (including, without  
limitation, any Indebtedness incurred or anticipated to be incurred in          
connection with or in respect of such transaction or series of transactions),   
no Default or Event of Default shall have occurred and be continuing and the    
Company or the Surviving Entity, as the case may be, after giving effect to     
such transaction or series of transactions on a pro forma basis (including,     
without limitation, any Indebtedness incurred or anticipated to be incurred in  
connection with or in respect of such transaction or series of transactions),   
could incur $1.00 of additional Indebtedness pursuant to the first paragraph    
of the covenant described under "--Limitation on Indebtedness" above (assuming  
a market rate of interest with respect to such additional Indebtedness); and    
(c) immediately after giving effect to such transaction or series of            
transactions on a pro forma basis (including, without limitation, any           
Indebtedness incurred or anticipated to be incurred in connection with or in    
respect of such transaction or series of transactions), the Consolidated Net    
Worth of the Company or the Surviving Entity, as the case may be, is at least   
equal to the Consolidated Net Worth of the Company immediately before such      
transaction or series of transactions.                                          

In connection with any consolidation, merger, transfer, lease, assignment or
other disposition contemplated hereby, the Company shall deliver, or cause to   
be delivered, to the Trustee, in form and substance reasonably satisfactory to  
the Trustee, an officer's certificate and an opinion of counsel, each stating   
that such consolidation, merger, transfer, lease, assignment or other           
disposition and the supplemental indenture in respect thereof comply with the   
requirements under the Indenture; provided, however, that solely for purposes   
of computing amounts described in subclause (C) of the covenant described       
under "--Limitation on Restricted Payments" above, any such successor person    
shall only be deemed to have succeeded to and be substituted for the Company    
with respect to periods subsequent to the effective time of such merger,        
consolidation or transfer of assets.                                            

Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, in which the     
Company is not the continuing corporation, the successor corporation formed by  
such a consolidation or into which the Company is merged or to which such       
transfer is made shall succeed to, and be substituted for, and may exercise     
every right and power of, the Company under the Indenture with the same effect  
as if such successor corporation had been named as the Company therein.         

EVENTS OF DEFAULT                                                           

The following will be "Events of Default" under the Indenture:              

 (i) default in the payment of the principal of or premium, if any, on any
Note when the same becomes due and payable (upon Stated Maturity,           
acceleration, optional redemption, required purchase, scheduled principal   
payment or otherwise); or                                                   

(ii) default in the payment of an installment of interest on any of the 
Senior Discount Notes, when the same becomes due and payable, which default 
continues for a period of 30 days; or                                       

 (iii) failure to perform or observe any other term, covenant or agreement
contained in the Senior Discount Notes or the Indenture (other than a       
default specified in clause (i) or (ii) above) and such default continues   
for a period of 30 days after written notice of such default requiring the  
Company to remedy the same shall have been given (x) to the Company by the  
Trustee or (y) to the Company and the Trustee by holders of 25% in          
aggregate principal amount of the Senior Discount Notes then outstanding;   
or                                                                          

(iv) default or defaults under one or more agreements, instruments,     
mortgages, bonds, debentures or other evidences of Indebtedness under which 
the Company or any Subsidiary of the Company then has outstanding           
Indebtedness in excess of $10,000,000, individually or in the aggregate,    
and either (a) such Indebtedness is already due and payable in full or (b)  
such default or defaults have resulted in the acceleration of the maturity  
of such Indebtedness; or                                                    

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(v) one or more judgments, orders or decrees of any court or regulatory 
or administrative agency of competent jurisdiction for the payment of money 
in excess of $10,000,000, either individually or in the aggregate, shall be 
entered against the Company or any Subsidiary of the Company or any of      
their respective properties and shall not be discharged or fully bonded and 
there shall have been a period of 60 days after the date on which any       
period for appeal has expired and during which a stay of enforcement of     
such judgment, order or decree shall not be in effect; or                   

(vi) certain events of bankruptcy, insolvency or reorganization with    
respect to the Company or any Significant Subsidiary of the Company shall   
have occurred.                                                              

If an Event of Default (other than as specified in clause (vi) above) shall 
occur and be continuing, the Trustee, by notice to the Company, or the holders  
of at least 25% in aggregate principal amount of the Senior Discount Notes      
then outstanding, by notice to the Trustee and the Company, may declare the     
principal of, premium, if any, and accrued and unpaid interest, if any, on all  
of the outstanding Senior Discount Notes due and payable immediately, upon      
which declaration, all amounts payable in respect of the Senior Discount Notes  
shall be immediately due and payable. If an Event of Default specified in       
clause (vi) above occurs and is continuing, then the principal of, premium, if  
any, and accrued and unpaid interest, if any, on all of the outstanding Senior  
Discount Notes shall ipso facto become and be immediately due and payable       
without any declaration or other act on the part of the Trustee or any holder   
of Senior Discount Notes.                                                       

After a declaration of acceleration under the Indenture, but before a       
judgment or decree for payment of the money due has been obtained by the        
Trustee, the holders of a majority in aggregate principal amount of the         
outstanding Senior Discount Notes, by written notice to the Company and the     
Trustee, may rescind such declaration if (a) the Company has paid or deposited  
with the Trustee a sum sufficient to pay (i) all sums paid or advanced by the   
Trustee under the Indenture and the reasonable compensation, expenses,          
disbursements and advances of the Trustee, its agents and counsel, (ii) all     
overdue interest on all Senior Discount Notes, (iii) the principal of and       
premium, if any, on any Senior Discount Notes which have become due otherwise   
than by such declaration of acceleration and interest thereon at the rate       
borne by the Senior Discount Notes, and (iv) to the extent that payment of      
such interest is lawful, interest upon overdue interest and overdue principal   
at the rate borne by the Senior Discount Notes which has become due otherwise   
than by such declaration of acceleration; (b) the rescission would not          
conflict with any judgment or decree of a court of competent jurisdiction; and  
(c) all Events of Default, other than the non-payment of principal of,          
premium, if any, and interest on the Senior Discount Notes that have become     
due solely by such declaration of acceleration, have been cured or waived.      

The holders of not less than a majority in aggregate principal amount of the
outstanding Senior Discount Notes may on behalf of the holders of all the       
Senior Discount Notes waive any past defaults under the Indenture, except a     
default in the payment of the principal of, premium, if any, or interest on     
any Note, or in respect of a covenant or provision which under the Indenture    
cannot be modified or amended without the consent of the holder of each Note    
outstanding.                                                                    

No holder of any of the Senior Discount Notes has any right to institute any
proceeding with respect to the Indenture or the Senior Discount Notes or any    
remedy thereunder, unless the holders of at least 25% in aggregate principal    
amount of the outstanding Senior Discount Notes have made written request, and  
offered reasonable indemnity, to the Trustee to institute such proceeding as    
Trustee under the Senior Discount Notes and the Indenture, the Trustee has      
failed to institute such proceeding within 30 days after receipt of such        
notice and the Trustee, within such 30-day period, has not received directions  
inconsistent with such written request by holders of a majority in aggregate    
principal amount of the outstanding Senior Discount Notes. Such limitations do  
not apply, however, to a suit instituted by a holder of a Note for the          
enforcement of the payment of the principal of, premium, if any, or interest    
on such Note on or after the respective due dates expressed in such Note.       

During the existence of an Event of Default, the Trustee is required to     
exercise such rights and powers vested in it under the Indenture and use the    
same degree of care and skill in its exercise thereof as a prudent person       
would exercise under the circumstances in the conduct of such person's own      
affairs. Subject to the                                                         

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provisions of the Indenture relating to the duties of the Trustee, whether or   
not an Event of Default shall occur and be continuing, the Trustee under the    
Indenture is not under any obligation to exercise any of its rights or powers   
under the Indenture at the request or direction of any of the holders unless    
such holders shall have offered to the Trustee reasonable security or           
indemnity. Subject to certain provisions concerning the rights of the Trustee,  
the holders of not less than a majority in aggregate principal amount of the    
outstanding Senior Discount Notes have the right to direct the time, method     
and place of conducting any proceeding for any remedy available to the          
Trustee, or exercising any trust or power conferred on the Trustee under the    
Indenture.                                                                      

If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee shall mail to each holder of the Senior Discount       
Notes notice of the Default or Event of Default within 30 days after obtaining  
knowledge thereof. Except in the case of a Default or an Event of Default in    
payment of principal of, premium, if any, or interest on any Senior Discount    
Notes, the Trustee may withhold the notice to the holders of such Senior        
Discount Notes if a committee of its trust officers in good faith determines    
that withholding the notice is in the interest of the holders of the Senior     
Discount Notes.                                                                 

The Company is required to furnish to the Trustee annual and quarterly      
statements as to the performance by the Company of its obligations under the    
Indenture and as to any default in such performance. The Company is also        
required to notify the Trustee within ten days of any event which is, or after  
notice or lapse of time or both would become, an Event of Default.              

DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE                              

The Company may, at its option and at any time, terminate the obligations of
the Company with respect to the outstanding Senior Discount Notes               
("defeasance"). Such defeasance means that the Company shall be deemed to have  
paid and discharged the entire Indebtedness represented by the outstanding      
Senior Discount Notes, except for (i) the rights of holders of outstanding      
Senior Discount Notes to receive payment in respect of the principal of,        
premium, if any, and interest on such Senior Discount Notes when such payments  
are due, (ii) the Company's obligations to issue temporary Senior Discount      
Notes, register the transfer or exchange of any Senior Discount Notes, replace  
mutilated, destroyed, lost or stolen Senior Discount Notes and maintain an      
office or agency for payments in respect of the Senior Discount Notes, (iii)    
the rights, powers, trusts, duties and immunities of the Trustee, and (iv) the  
defeasance provisions of the Indenture. In addition, the Company may, at its    
option and at any time, elect to terminate the obligations of the Company with  
respect to certain covenants that are set forth in the Indenture, some of       
which are described under "--Certain Covenants" above (including the covenant   
described under "Change of Control" above) and any subsequent failure to        
comply with such obligations shall not constitute a Default or Event of         
Default with respect to the Senior Discount Notes ("covenant defeasance").      

In order to exercise either defeasance or covenant defeasance, (i) the      
Company must irrevocably deposit with the Trustee, in trust, for the benefit    
of the holders of the Senior Discount Notes, cash in United States dollars,     
U.S. Government Obligations (as defined in the Indenture), or a combination     
thereof, in such amounts as will be sufficient, in the opinion of a nationally  
recognized firm of independent public accountants, to pay the principal of,     
premium, if any, and interest on the outstanding Senior Discount Notes to       
redemption or maturity (except lost, stolen or destroyed Senior Discount Notes  
which have been replaced or paid); (ii) the Company shall have delivered to     
the Trustee an opinion of counsel to the effect that the holders of the         
outstanding Senior Discount Notes will not recognize income, gain or loss for   
federal income tax purposes as a result of such defeasance or covenant          
defeasance and will be subject to federal income tax on the same amounts, in    
the same manner and at the same times as would have been the case if such       
defeasance or covenant defeasance had not occurred (in the case of defeasance,  
such opinion must refer to and be based upon a ruling of the Internal Revenue   
Service or a change in applicable federal income tax laws); (iii) no Default    
or Event of Default shall have occurred and be continuing on the date of such   
deposit; (iv) such defeasance or covenant defeasance shall not cause the        
Trustee to have a conflicting interest with respect to any securities of the    
Company; (v) such defeasance or covenant defeasance shall not result in a       
breach or violation of, or constitute a default under, any material agreement   
or instrument to which the Company is a party or by which it is bound; (vi)     
the Company                                                                     

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shall have delivered to the Trustee an opinion of counsel to the effect that    
after the 91st day following the deposit, the trust funds will not be subject   
to the effect of any applicable bankruptcy, insolvency, reorganization or       
similar laws affecting creditors' rights generally; and (vii) the Company       
shall have delivered to the Trustee an officers' certificate and an opinion of  
counsel, each stating that all conditions precedent under the Indenture to      
either defeasance or covenant defeasance, as the case may be, have been         
complied with.                                                                  

SATISFACTION AND DISCHARGE                                                  

The Indenture will be discharged and will cease to be of further effect     
(except as to surviving rights or registration of transfer or exchange of the   
Senior Discount Notes, as expressly provided for in the Indenture) as to all    
outstanding Senior Discount Notes when (i) either (a) all the Senior Discount   
Notes theretofore authenticated and delivered (except lost, stolen or           
destroyed Senior Discount Notes which have been replaced or repaid and Senior   
Discount Notes for whose payment money has theretofore been deposited in trust  
or segregated and held in trust by the Company and thereafter repaid to the     
Company or discharged from such trust) have been delivered to the Trustee for   
cancellation or (b) all Senior Discount Notes not theretofore delivered to the  
Trustee for cancellation (except lost, stolen or destroyed Senior Discount      
Notes which have been replaced or paid) have been called for redemption         
pursuant to the terms of the Senior Discount Notes or have otherwise become     
due and payable and the Company has irrevocably deposited or caused to be       
deposited with the Trustee funds in an amount sufficient to pay and discharge   
the entire Indebtedness on the Senior Discount Notes not theretofore delivered  
to the Trustee for cancellation, for principal of, premium, if any, and         
interest on the Senior Discount Notes to the date of deposit together with      
irrevocable instructions from the Company directing the Trustee to apply such   
funds to the payment thereof at maturity or redemption, as the case may be;     
(ii) the Company has paid all other sums payable under the Indenture by the     
Company; (iii) there exists no Default or Event of Default under the            
Indenture; and (iv) the Company has delivered to the Trustee an officers'       
certificate and an opinion of counsel stating that all conditions precedent     
under the Indenture relating to the satisfaction and discharge of the           
Indenture have been complied with.                                              

AMENDMENTS AND WAIVERS                                                      

From time to time, the Company, when authorized by a resolution of its Board
of Directors, and the Trustee may, without the consent of the holders of any    
outstanding Senior Discount Notes, amend, waive or supplement the Indenture or  
the Senior Discount Notes for certain specified purposes, including, among      
other things, curing ambiguities, defects or inconsistencies, qualifying, or    
maintaining the qualification of, the Indenture under the Trust Indenture Act   
of 1939 or making any other change that does not adversely affect the rights    
of any holder of Senior Discount Notes; provided, however, that the Company     
has delivered to the Trustee an opinion of counsel stating that such change     
does not adversely affect the rights of any holder of Senior Discount Notes.    
Other amendments and modifications of the Indenture or the Senior Discount      
Notes may be made by the Company and the Trustee with the consent of the        
holders of not less than a majority of the aggregate principal amount of the    
outstanding Senior Discount Notes; provided, however, that no such              
modification or amendment may, without the consent of the holder of each        
outstanding Note affected thereby, (i) reduce the principal amount of, extend   
the fixed maturity of or alter the redemption provisions of, the Senior         
Discount Notes, (ii) change the currency in which any Senior Discount Notes or  
any premium or the interest thereon is payable or make the principal of,        
premium, if any, or interest on any Note payable in money other than that       
stated in the Note, (iii) reduce the percentage in principal amount of          
outstanding Senior Discount Notes that must consent to an amendment,            
supplement or waiver or consent to take any action under the Indenture or the   
Senior Discount Notes, (iv) impair the right to institute suit for the          
enforcement of any payment on or with respect to the Senior Discount Notes,     
(v) waive a default in payment with respect to the Senior Discount Notes, (vi)  
amend, change or modify the obligations of the Company to make and consummate   
a Change of Control Offer in the event of a Change of Control or make and       
consummate the offer with respect to any Asset Sale or modify any of the        
provisions or definitions with respect thereto, (viii) reduce or change the     
rate or time for payment of interest on the Senior Discount Notes, or (ix)      
modify or change any provision of the Indenture affecting the ranking of the    
Senior Discount Notes in a manner adverse to the holders of the Senior          
Discount Notes.                                                                 

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THE TRUSTEE                                                                 

The Indenture provides that, except during the continuance of an Event of   
Default, the Trustee thereunder will perform only such duties as are            
specifically set forth in the Indenture. If an Event of Default has occurred    
and is continuing, the Trustee will exercise such rights and powers vested in   
it under the Indenture and use the same degree of care and skill in its         
exercise as a prudent person would exercise under the circumstances in the      
conduct of such person's own affairs.                                           

The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the      
Trustee thereunder, should it become a creditor of the Company, to obtain       
payment of claims in certain cases or to realize on certain property received   
by it in respect of any such claims, as security or otherwise. The Trustee is   
permitted to engage in other transactions; provided, however, that if it        
acquires any conflicting interest (as defined in such Act) it must eliminate    
such conflict or resign.                                                        

GOVERNING LAW                                                               

The Indenture and the Senior Discount Notes are governed by the laws of the 
State of New York, without regard to the principles of conflicts of law.        

CERTAIN DEFINITIONS                                                         

"Accreted Value" is defined to mean, for any specified date (the "Specified 
Date"), the amount calculated pursuant to (i), (ii), (iii) or (iv) for each     
$1,000 principal amount at maturity of Senior Discount Notes:                   

(i) if the Specified Date occurs on one or more of the following dates  
(each a "Semi-Annual Accrual Date"), the Accreted Value will equal the      
amount set forth below for such Semi-Annual Accrual Date:                   

                                                                [Download Table]

SEMI-ANNUAL ACCRUAL DATE                                   ACCRETED VALUE
------------------------                                   --------------
                                                                         
November 1, 1997..........................................   $  774.26   
May 1, 1998...............................................   $  814.91   
November 1, 1998..........................................   $  857.69   
May 1, 1999...............................................   $  902.72   
November 1, 1999..........................................   $  950.11   
May 1, 2000...............................................   $1,000.00   

(ii) if the Specified Date occurs before the first Semi-Annual Accrual  
Date, the Accreted Value will equal the sum of (a) the original issue price 
and (b) an amount equal to the product of (1) the Accreted Value for the    
first Semi-Annual Accrual Date less the original issue price multiplied by  
(2) a fraction, the numerator of which is the number of days from the issue 
date of the Senior Discount Notes to the Specified Date, using a 360-day    
year of twelve 30-day months, and the denominator of which is the number of 
days elapsed from the issue date of the Senior Discount Notes to the first  
Semi-Annual Accrual Date, using a 360-day year of twelve 30-day months;     

 (iii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the Accreted Value will equal the sum of (a) the Accreted Value for the     
Semi-Annual Accrual Date immediately preceding such Specified Date and (b)  
an amount equal to the product of (1) the Accreted Value for the            
immediately following Semi-Annual Accrual Date less the Accreted Value for  
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a      
fraction, the numerator of which is the number of days from the immediately 
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day   
year of twelve 30-day months, and the denominator of which is 180; or       

(iv) if the Specified Date occurs after the last Semi-Annual Accrual    
Date, the Accreted Value will equal $1,000.                                 

"Acquired Indebtedness" means Indebtedness of a person (a) assumed in       
connection with an Asset Acquisition from such person or (b) existing at the    
time such person becomes a Subsidiary of any other person; provided that        
Acquired Indebtedness shall not include any such Indebtedness that was          
incurred in anticipation or contemplation of such Asset Acquisition or such     
person becoming a Subsidiary.                                                   

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"Affiliate" means, with respect to any specified person, any other person   
directly or indirectly controlling or controlled by or under direct or          
indirect common control with such specified person.                             

"Asset Acquisition" means (a) an Investment by the Company or any Subsidiary
of the Company in any other person pursuant to which such person shall become   
a Subsidiary of the Company, or shall be merged with or into the Company or     
any Subsidiary of the Company, (b) the acquisition by the Company or any        
Subsidiary of the Company of the assets of any person (other than a Subsidiary  
of the Company) which constitute all or substantially all of the assets of      
such person or (c) the acquisition by the Company or any Subsidiary of the      
Company of any division or line of business of any person (other than a         
Subsidiary of the Company).                                                     

"Asset Disposition" means the sale or other disposition by the Company or   
any of its Subsidiaries (other than to the Company or another Subsidiary of     
the Company) of (i) all or substantially all of the Capital Stock of any        
Subsidiary of the Company or (ii) all or substantially all of the assets that   
constitute a division or line of business of the Company or any of its          
Subsidiaries.                                                                   

"Asset Sale" means any direct or indirect sale, issuance, conveyance,       
transfer, lease or other disposition to any person other than the Company or a  
Wholly-Owned Subsidiary of the Company, in one or a series of related           
transactions, of (a) any Capital Stock of any Subsidiary of the Company (other  
than in respect of director's qualifying shares or investments by foreign       
nationals mandated by applicable law); (b) all or substantially all of the      
properties and assets of any division or line of business of the Company or     
any Subsidiary of the Company; or (c) any other properties or assets of the     
Company or any Subsidiary of the Company other than in the ordinary course of   
business. For the purposes of this definition, the term "Asset Sale" shall not  
include (i) any sale, transfer or other disposition of equipment, tools or      
other assets (including Capital Stock of any Subsidiary of the Company) by the  
Company or any of its Subsidiaries in one or a series of related transactions   
in respect of which the Company or such Subsidiary receives cash or property    
with an aggregate Fair Market Value of $1,000,000 or less; and (ii) any sale,   
issuance, conveyance, transfer, lease or other disposition of properties or     
assets that is governed by the provisions described under "--Merger, Sale of    
Assets, Etc." above.                                                            

"Attributable Value" means, as to any particular lease and at any date as of
which the amount thereof is to be determined, the total net amount of rent      
required to be paid by such Person under such lease during the initial term     
thereof as determined in accordance with GAAP, discounted from the last date    
of such initial term to the date of determination at a rate per annum equal to  
the discount rate which would be applicable to a Capitalized Lease Obligation   
with a like term in accordance with GAAP. The net amount of rent required to    
be paid under any such lease for any such period shall be the aggregate amount  
of rent payable by the lessee with respect to such period after excluding       
amounts required to be paid on account of insurance, taxes, assessments,        
utility, operating and labor costs and similar charges. In the case of any      
lease which is terminable by the lessee upon the payment of a penalty, such     
net amount shall also include the amount of such penalty, but no rent shall be  
considered as required to be paid under such lease subsequent to the first      
date upon which it may be so terminated.                                        

"Average Life to Stated Maturity" means, with respect to any Indebtedness,  
as at any date of determination, the quotient obtained by dividing (i) the sum  
of the products of (a) the number of years (or any fraction thereof) from such  
date to the date or dates of each successive scheduled principal payment        
(including, without limitation, any sinking fund requirements) of such          
Indebtedness multiplied by (b) the amount of each such principal payment by     
(ii) the sum of all such principal payments.                                    

"Capital Stock" means, with respect to any person, any and all shares,      
interests, participations, rights in or other equivalents (however designated)  
of such person's capital stock, and any rights (other than debt securities      
convertible into capital stock), warrants or options exchangeable for or        
convertible into such capital stock.                                            

"Capitalized Lease Obligation" means any obligation under a lease of (or    
other agreement conveying the right to use) any property (whether real,         
personal or mixed) that is required to be classified and accounted for as a     
capital lease obligation under GAAP, and, for the purpose of the Indenture,     
the amount of such obligation at any date shall be the capitalized amount       
thereof at such date, determined in accordance with GAAP.                       

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"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness with
a maturity of 180 days or less issued or directly and fully guaranteed or       
insured by the Untied States of America or any agency or instrumentality        
thereof (provided that the full faith and credit of the United States of        
America is pledged in support thereof); (ii) certificates of deposit or         
acceptances with a maturity of 180 days or less of any financial institution    
that is a member of the Federal Reserve System having combined capital and      
surplus and undivided profits of not less than $500,000,000; (iii) Eurodollar   
time deposits with a maturity of 180 days or less of any financial institution  
that is not organized under the laws of the United States, any state thereof    
or the District of Columbia that are rated at least A-1 by S&P or at least P-1  
by Moody's or at least an equivalent rating category of another nationally      
recognized securities rating agency; (iv) commercial paper with a maturity of   
180 days or less that are rated at least A-1 by S&P, or at least P-1 by         
Moody's or at least an equivalent rating category of another nationally         
recognized securities rating agency; (v) tax-exempt investments that are rated  
at least SP1/A1 by S&P and/or P1/VM1G1/M1G1 by Moody's; (vi) money market       
accounts of any financial institution that is a member of the Federal Reserve   
System having combined capital and surplus and undivided profits of not less    
than $500,000,000; and (vii) repurchase agreements and reverse repurchase       
agreements relating to marketable direct obligations issued or unconditionally  
guaranteed by the government of the United States of America or issued by any   
agency thereof and backed by the full faith and credit of the United States of  
America, in each case maturing within 180 days from the date of acquisition;    
provided that the terms of such agreements comply with the guidelines set       
forth in the Federal Financial Agreements of Depository Institutions With       
Securities Dealers and Others, as adopted by the Comptroller of the Currency    
on October 31, 1985.                                                            

"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of  
the Exchange Act), excluding Permitted Holders, is or becomes the "Beneficial   
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except      
that a person shall be deemed to have "Beneficial ownership" of all securities  
that such person has the right to acquire, whether such right is exercisable    
immediately or only after the passage of time, upon the happening of an event   
or otherwise), directly or indirectly, of more than 35% of the voting power of  
the total Voting Stock of the Company; provided, however, that the Permitted    
Holders (i) "Beneficially own" (as so defined) a lower percentage of the        
voting power of the Voting Stock than such other person or "group" and (ii) do  
not have the right or ability by voting power, contract or otherwise to elect   
or designate for election a majority of the Board of Directors of the Company;  
or (b) individuals who on the Issue Date constitute the Board of Directors of   
the Company (together with any new directors whose election by the Board of     
Directors of the Company or whose nomination for election by the Company's      
stockholders was approved by a vote of at least two-thirds of the members of    
the Board of Directors of the Company then in office who either were members    
of the Board of Directors of the Company on the Issue Date of whose election    
or nomination for election was previously so approved) cease for any reason to  
constitute a majority of the members of the Board of Directors of the Company   
then in office.                                                                 

"Common Stock" means, with respect to any person, any and all shares,       
interests or other participations in, and other equivalents (however            
designated and whether voting or nonvoting) of, such person's common stock,     
whether outstanding at the Issue Date or issued after the Issue Date, and       
includes, without limitation, all series and classes of such common stock.      

"Consolidated Cash Flow" means, for any period, the sum of the amounts for  
such period of (i) Consolidated Net Income, (ii) Consolidated Interest          
Expense, (iii) income taxes, to the extent such amount was deducted in          
calculating Consolidated Net Income (other than income taxes (either positive   
or negative) attributable to extraordinary and non-recurring gains or losses    
or sales of assets), (iv) depreciation expense, to the extent such amount was   
deducted in calculating Consolidated Net Income, (v) amortization expense, to   
the extent such amount was deducted in calculating Consolidated Net Income,     
and (vi) all other non-cash items reducing Consolidated Net Income (excluding   
any non-cash charge to the extent that it represents an accrual of or reserve   
for cash charges in any future period), less all non-cash items increasing      
Consolidated Net Income, all as determined on a consolidated basis for the      
Company and its Subsidiaries in conformity with GAAP.                           

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"Consolidated Fixed Charges" means, for any period, Consolidated Interest   
Expense plus dividends declared and payable on Preferred Stock.                 

"Consolidated Interest Expense" means, for any period, the aggregate amount 
of interest in respect of Indebtedness (including capitalized interest,         
amortization of original issue discount on any Indebtedness and the interest    
portion of any deferred payment obligation, calculated in accordance with the   
effective interest method of accounting; all commissions, discounts and other   
fees and charges owed with respect to letters of credit and bankers'            
acceptance financing; the net costs associated with Interest Rate Protection    
Agreements; and interest on Indebtedness that is guaranteed or secured by the   
Company or any of its Subsidiaries) and all but the principal component of      
rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled  
to be paid or to be accrued by the Company and its Subsidiaries during such     
period.                                                                         

"Consolidated Net Income" means, for any period, the aggregate net income   
(or loss) of the Company and its Subsidiaries for such period determined in     
conformity with GAAP; provided that the following items shall be excluded in    
computing Consolidated Net Income (without duplication): (i) solely for the     
purposes of calculating the amount of Restricted Payments that may be made      
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted  
Payments" covenant described above, the net income (or loss) of any Person      
accrued prior to the date it becomes a Subsidiary or is merged into or          
consolidated with the Company or any of its Subsidiaries or all or              
substantially all of the property and assets of such Person are acquired by     
the Company or any of its Subsidiaries; (ii) any gains or losses (on an after-  
tax basis) attributable to Asset Sales; (iii) except for purposes of            
calculating the amount of Restricted Payments that may be pursuant to clause    
(C) of the first paragraph of the "Limitation on Restricted Payments" covenant  
described above, any amount paid or accrued as dividends on Preferred Stock of  
the Company or Preferred Stock of any Subsidiary owned by Persons other than    
the Company and any of its Subsidiaries; (iv) all extraordinary gains and       
extraordinary losses; and (v) the net income (or loss) of any Person (other     
than net income (or loss) attributable to a Subsidiary) in which any Person     
(other than the Company or any of its Subsidiaries) has a joint interest,       
except to the extent of the amount of dividends or other distributions          
actually paid to the Company or any of its Subsidiaries by such other Person    
during such period.                                                             

"Consolidated Net Worth" means, with respect to any person at any date, the 
consolidated stockholders' equity of such person less the amount of such        
stockholders, equity attributable to Redeemable Capital Stock of such person    
and its Subsidiaries, as determined in accordance with GAAP.                    

"Credit Facilities" is defined to mean, with respect to the Company, one or 
more debt facilities or commercial paper facilities with banks or other         
institutional lenders providing for revolving credit loans, term loans,         
receivables financing (including through the sale of receivables to such        
lenders or to special purpose entities formed to borrow from such lenders       
against such receivables) or letters of credit, in each case, as amended,       
restated, modified, renewed, refunded, replaced or refinanced in whole or in    
part from time to time.                                                         

"Currency Agreement" means any foreign exchange contract, currency swap     
agreement or other similar agreement or arrangement designed to protect the     
Company or any of its Subsidiaries against fluctuations in currency values.     

"Default" means any event that is, or after notice or passage of time or    
both would be, an Event of Default.                                             

"Eligible Accounts Receivable" is defined to mean the accounts receivables  
(net of any reserves and allowances for doubtful accounts in accordance with    
GAAP) of any person that are not more than 60 days past their due date and      
that were entered into in the ordinary course of business on normal payment     
terms as shown on the most recent consolidated balance sheet of such person     
filed with the Commission, all in accordance with GAAP.                         

"Event of Default" has the meaning set forth under "Events of Default"      
herein.                                                                         

"Exchange Act" means the Securities Exchange Act of 1934, as amended.       

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"Fair Market Value" means, with respect to any assets, the price, as        
determined by the Board of Directors of the Company, acting in good faith,      
which could be negotiated in an arm's-length free market transaction, for       
cash, between a willing seller and a willing buyer, neither of which is under   
pressure or compulsion to complete the transaction; provided, however, that,    
with respect to any transaction which involves an asset or assets in excess of  
$2,000,000, such determination shall be evidenced by resolutions of the Board   
of Directors of the Company delivered to the Trustee.                           

"Final Maturity Date" means November 1, 2004.                               

"GAAP" means generally accepted accounting principles set forth in the      
opinions and pronouncements of the Accounting Principles Board of the American  
Institute of Certified Public Accountants and statements and pronouncements of  
the Financial Accounting Standards Board or in such other statements by such    
other entity as may be approved by a significant segment of the accounting      
profession of the United States of America, which are applicable from time to   
time and are consistently applied.                                              

"Guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course  
of business), direct or indirect, in any manner, of any part or all of such     
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,  
the practical effect of which is to assure in any way the payment or            
performance (or payment of damages in the event of non-performance) of all or   
any part of such obligation, including, without limiting the foregoing, the     
payment of amounts drawn down by letters of credit.                             

"Indebtedness" means, with respect to any person at any date of             
determination (without duplication), (i) all indebtedness of such person for    
borrowed money, (ii) all obligations of such person evidenced by bonds,         
debentures, Senior Discount Notes or other similar instruments, (iii) all       
obligations of such person in respect of letters of credit or other similar     
instruments (including reimbursement obligations with respect thereto), (iv)    
all obligations of such person to pay the deferred and unpaid purchase price    
of property or services, which purchase price is due more than six months       
after the date of placing such property in service or taking delivery and       
title thereto or the completion of such services, except Trade payables, (v)    
all obligations of such person as lessee under Capitalized Lease Obligations,   
(vi) all Indebtedness of other persons secured by a Lien on any asset of such   
person, whether or not such Indebtedness is assumed by such person; provided    
that the amount of such Indebtedness shall be the lesser of (A) the fair        
market value of such asset at such date of determination and (B) the amount of  
such Indebtedness, (vii) all Indebtedness of other persons guaranteed by such   
person to the extent such Indebtedness is guaranteed by such person, (viii)     
the maximum fixed redemption or repurchase price of Redeemable Capital Stock    
of such person at the time of determination and (ix) to the extent not          
otherwise included in this definition, obligations under Currency Agreements    
and Interest Rate Protection Agreements. The amount of Indebtedness of any      
Person at any date shall be the outstanding balance at such date of all         
unconditional obligations as described above and, with respect to contingent    
obligations, the maximum liability upon the occurrence of the contingency       
giving rise to the obligation, (i) that the amount outstanding at any time of   
any Indebtedness issued with original issue discount is the face amount of      
such Indebtedness less the remaining unamortized portion of the original issue  
discount of such Indebtedness at such time as determined in conformity with     
GAAP and (ii) that Indebtedness shall not include any liability for federal,    
state, local or other taxes.                                                    

"Independent Financial Advisor" means a firm (i) which does not, and whose  
directors, officers and employees or Affiliates do not, have a direct or        
indirect financial interest in the Company and (ii) which, in the judgment of   
the Board of Directors of the Company, is otherwise independent and qualified   
to perform the task for which it is to be engaged.                              

"Interest Rate Protection Agreement" means any arrangement with any other   
person whereby, directly or indirectly, such person is entitled to receive      
from time to time periodic payments calculated by applying either a floating    
or a fixed rate of interest on a stated notional amount in exchange for         
periodic payments made by such person calculated by applying a fixed or a       
floating rate of interest on the same notional amount and shall include         
without limitation, interest rate swaps, caps, floors, collars and similar      
agreements.                                                                     

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"Investment" means, with respect to any person, any direct or indirect,     
loan, guarantee, or other extension of credit or capital contribution to (by    
means of any transfer of cash or other property to others or any payment for    
property or services for the account or use of others), or any purchase or      
acquisition by such person of any Capital Stock, bonds, notes, debentures or    
other securities or evidences of Indebtedness issued by, any other person. In   
addition, the Fair Market Value of the assets of any Subsidiary of the Company  
at the time that such Subsidiary is designated as an Unrestricted Subsidiary    
shall be deemed to be an Investment made by the Company in such Unrestricted    
Subsidiary at such time. "Investments" shall exclude extensions of trade        
credit by the Company and its Subsidiaries in the ordinary course of business   
in accordance with normal trade practices of the Company or such Subsidiary,    
as the case may be.                                                             

"Lien" means any mortgage, charge, pledge, lien (statutory or other),       
security interest, hypothecation, assignment for security, claim, or            
preference or priority or other encumbrance upon or with respect to any         
property of any kind. A person shall be deemed to own subject to a Lien any     
property which such person has acquired or holds subject to the interest of a   
vendor or lessor under any conditional sale agreement, capital lease or other   
title retention agreement.                                                      

"Maturity Date" means, with respect to any security, the date on which any  
principal of such security becomes due and payable as therein or herein         
provided, whether at the Stated Maturity with respect to such principal or by   
declaration of acceleration, call for redemption or purchase or otherwise.      

"Moody's" means Moody's Investors Service, Inc. and its successors.         

"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds     
thereof in the form of cash or Cash Equivalents including payments in respect   
of deferred payment obligations when received in the form of cash or Cash       
Equivalents (except to the extent that such obligations are financed or sold    
with recourse to the Company or any Subsidiary of the Company) net of (i)       
brokerage commissions and other fees and expenses (including, without           
limitation, fees and expenses of legal counsel and investment bankers) related  
to such Asset Sale, (ii) provisions for all taxes payable as a result of such   
Asset Sale, (iii) amounts required to be paid to any person (other than the     
Company or any Subsidiary of the Company) owning a beneficial interest in the   
assets subject to the Asset Sale or has a security interest in such assets and  
(iv) appropriate amounts to be provided by the Company or any Subsidiary of     
the Company, as the case may be, as a reserve required in accordance with GAAP  
against any liabilities associated with such Asset Sale and retained by the     
Company or any Subsidiary of the Company, as the case may be, after such Asset  
Sale, including, without limitation, pension and other post-employment benefit  
liabilities, liabilities related to environmental matters and liabilities       
under any indemnification obligations associated with such Asset Sale, all as   
reflected in an officers' certificate delivered to the Trustee.                 

"Pari Passu Indebtedness" means Indebtedness of the Company which ranks pari
passu in right of payment with the Senior Discount Notes.                       

"Permitted Holder" means (x) Fred Gratzon, Shelley Levin-Gratzon or Clifford
Rees or (y) any Affiliate of any Person named in the foregoing clause or (x)    
any trust for the benefit of any such Person or any of such Person's family     
members or descendants.                                                         

"Permitted Investments" means any of the following: (i) Investments in any  
Subsidiary of the Company (including any person that pursuant to such           
Investment becomes a Subsidiary of the Company) and any person that is merged   
or consolidated with or into, or transfers or conveys all or substantially all  
of its assets to, the Company or any Subsidiary of the Company at the time      
such Investment is made; (ii) Investments in Cash Equivalents; (iii)            
Investments in deposits with respect to leases or utilities provided to third   
parties in the ordinary course of business; (iv) Investments in Currency        
Agreements on commercially reasonable terms entered into by the Company or any  
of its Subsidiaries in the ordinary course of business in connection with the   
operations of the business of the Company or its Subsidiaries to hedge against  
fluctuations in foreign exchange rates; (v) loans or advances to officers,      
employees or consultants of the Company and its Subsidiaries in the ordinary    
course of                                                                       

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business for bona fide business purposes of the Company and its Subsidiaries    
(including travel and moving expenses) not in excess of $1,000,000 in the       
aggregate at any one time outstanding; (vi) Investments in evidences of         
Indebtedness, securities or other property received from another person by the  
Company or any of its Subsidiaries in connection with any bankruptcy            
proceeding or by reason of a composition or readjustment of debt or a           
reorganization of such person or as a result of foreclosure, perfection or      
enforcement of any Lien in exchange for evidences of Indebtedness, securities   
or other property of such person held by the Company or any of its              
Subsidiaries, or for other liabilities or obligations of such other person to   
the Company or any of its Subsidiaries that were created, in accordance with    
the terms of the Indenture; and (vii) Investments in Interest Rate Protection   
Agreements on commercially reasonably terms entered into by the Company or any  
of its Subsidiaries in the ordinary course of business in connection with the   
operations of the business of the Company or its Subsidiaries to hedge against  
fluctuations in interest rates.                                                 

"Permitted Liens" means the following types of Liens:                       

 (a) Liens for taxes, assessments or governmental charges or claims either
(a) not delinquent or (b) contested in good faith by appropriate            
proceedings and as to which the Company or any of its Subsidiaries shall    
have set aside on its books such reserves as may be required pursuant to    
GAAP;                                                                       

(b) statutory Liens of landlords and Liens of carriers, warehousemen,   
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law 
incurred in the ordinary course of business for sums not yet delinquent or  
being contested in good faith, if such reserve or other appropriate         
provision, if any, as shall be required by GAAP shall have been made in     
respect thereof;                                                            

 (c) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other     
types of social security, or to secure the performance of tenders,          
statutory obligations, surety and appeal bonds, bids, leases, governmental  
contracts, performance and return-of-money bonds and other similar          
obligations (exclusive of obligations for the payment of borrowed money);   

 (d) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may   
have been duly initiated for the review of such judgment shall not have     
been finally terminated or the period within which such proceedings may be  
initiated shall not have expired;                                           

(e) easements, rights-of-way, zoning restrictions and other similar     
charges or encumbrances in respect of real property not interfering in any  
material respect with the ordinary conduct of the business of the Company   
or any of its Subsidiaries;                                                 

(f) any interest or title of a lessor under any Capitalized Lease       
Obligation or operating lease;                                              

(g) Liens to finance the acquisition, cost of design, development,      
construction, installation or integration of property or assets of the      
Company or any Subsidiary of the Company in the ordinary course of          
business; provided, however, that (i) the related Indebtedness shall not be 
secured by any property or assets of the Company or any Subsidiary of the   
Company other than such property or assets and any improvements thereto and 
(ii) the Lien securing such Indebtedness either (x) exists at the time of   
such acquisition or construction or (y) shall be created within 90 days of  
such acquisition, construction or commencement of full operation of such    
property or assets;                                                         

 (h) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the           
importation of goods;                                                       

(i) leases or subleases granted to others that do not materially        
interfere with the ordinary course of business of the Company and its       
Subsidiaries, taken as a whole;                                             

(j) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of the Company or its            
Subsidiaries relating to such property or assets;                           

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(k) Liens arising from filing Uniform Commercial Code financing         
statements regarding leases;                                                

(l) Liens on property of, or on shares of stock or Indebtedness of, any 
corporation existing at the time such corporation becomes, or becomes a     
part of, any Subsidiary; provided that such Liens do not extend to or cover 
any property or assets of the Company or any Subsidiary other than the      
property or assets acquired and were not created in contemplation of such   
transaction;                                                                

(m) Liens securing reimbursement obligations with respect to letters of 
credit that encumber documents and other property relating to such letters  
of credit and the products and proceeds thereof; and                        

(n) Liens encumbering customary initial deposits and margin deposits and
other Liens that are either within the general parameters customary in the  
industry or incurred in the ordinary course of business, in each case       
securing Indebtedness under Interest Rate Protection Agreements and         
Currency Agreements.                                                        

"Person" or "person" means any individual, corporation, limited liability   
company partnership, joint venture, association, joint-stock company, trust,    
charitable foundation, unincorporated organization, government or any agency    
or political subdivision thereof or any other entity.                           

"Preferred Stock" means, with respect to any person, any and all shares,    
interests, participations or other equivalents, however designated, whether     
voting or nonvoting, of such persons preferred or preferred stock, whether new  
outstanding or issued after the Issue Date, including without limitation, all   
series and classes of such preferred or preferred stock.                        

"Pro Forma Consolidated Cash Flow" is defined to mean, for any period, the  
Consolidated Cash Flow of the Company for such period calculated on a pro       
forma basis to give effect to any Asset Disposition or Asset Acquisition not    
in the ordinary course of business (including acquisition of other persons by   
merger, consolidation or purchase of Capital Stock) during such period as if    
such Asset Disposition or Asset Acquisition had taken place on the first day    
of such period.                                                                 

"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or  
intangible, excluding Capital Stock in any other Person.                        

"Redeemable Capital Stock" means any shares of any class or series of       
Capital Stock, that, either by the terms thereof, by the terms of any security  
into which it is convertible or exchangeable or by contract or otherwise, is    
or upon the happening of an event or passage of time would be, required to be   
redeemed prior to the final Stated Maturity with respect to any Note or is      
redeemable at the option of the holder thereof at any time prior to any such    
Stated Maturity Date, or is convertible into or exchangeable for debt           
securities at any time prior to any such Stated Maturity.                       

"Sale and Leaseback Transaction" means, with respect to any Person, any     
direct or indirect arrangement pursuant to which Property is sold or            
transferred by such Person or a Subsidiary of such Person and is thereafter     
leased back from the purchaser or transferee thereof by such Person or one of   
its Subsidiaries.                                                               

"Significant Subsidiary" shall have the same meaning as in Rule 1.02(w) of  
Regulation S-X under the Securities Act.                                        

"S&P" means Standard & Poor's Corporation, and its successors.              

"Stated Maturity" means, when used with respect to any Note or any          
installment of interest thereon, the date specified in such Note as the fixed   
date on which the principal of such Note or such installment of interest is     
due and payable, and when used with respect to any other Indebtedness, means    
the date specified in the instrument governing such Indebtedness as the fixed   
date on which the principal of such Indebtedness, or any installment of         
interest thereon, is due and payable.                                           

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"Subordinated Indebtedness" means Indebtedness of the Company which is      
expressly subordinated in right of payment to the Senior Discount Notes.        

"Subsidiary" means, with respect to any person, (i) a corporation a majority
of whose Voting Stock is at the time, directly or indirectly, owned by such     
person, by one or more Subsidiaries of such person or by such person and one    
or more Subsidiaries thereof and (ii) any other person (other than a            
corporation), including, without limitation, a joint venture, in which such     
person, one or more Subsidiaries thereof or such person and one or more         
Subsidiaries thereof, directly or indirectly, at the date of determination      
thereof, has at least majority ownership interest entitled to vote in the       
election of directors, managers or trustees thereof (or other person            
performing similar functions). For purposes of this definition, any directors'  
qualifying shares or investments by foreign nationals mandated by applicable    
law shall be disregarded in determining the ownership of a Subsidiary.          
Notwithstanding the foregoing, an Unrestricted Subsidiary shall not be deemed   
a Subsidiary of the Company under the Indenture, other than for purposes of     
the definition of an Unrestricted Subsidiary, unless the Company shall have     
designated an Unrestricted Subsidiary as a "Subsidiary" by written notice to    
the Trustee under the Indenture, accompanied by an Officers' Certificate as to  
compliance with the Indenture; provided, however, that the Company shall not    
be permitted to designate any Unrestricted Subsidiary as a Subsidiary unless,   
after giving pro forma effect to such designation, (i) the Company would be     
permitted to incur $1.00 of additional Indebtedness under the first paragraph   
of the covenant described under "--Limitation on Indebtedness" above (assuming  
a market rate of interest with respect to such Indebtedness) and (ii) all       
Indebtedness and Liens of such Unrestricted Subsidiary would be permitted to    
be incurred by a Subsidiary of the Company under the Indenture. A designation   
of an Unrestricted Subsidiary as a Subsidiary may not thereafter be rescinded.  

"Trade Payables" means any accounts payable or any other indebtedness or    
monetary obligation to trade creditors created, assumed or guaranteed by the    
Company or any of its Subsidiaries arising in the ordinary course of business   
in connection with the acquisition of goods and services.                       

"Transaction Date" means, with respect to the incurrence of any Indebtedness
by the Company or any of its Subsidiaries, the date such Indebtedness is to be  
incurred.                                                                       

"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that shall
be designated an Unrestricted Subsidiary by the Board of Directors of the       
Company in the manner provided below and (ii) any Subsidiary of an              
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary    
(including any newly acquired or newly formed Subsidiary of the Company) to be  
an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of,    
or owns or holds any Lien on any property of, the Company or any Subsidiary;    
provided that (A) any guarantee by the Company or any Subsidiary of any         
Indebtedness of the Subsidiary being so designated shall be deemed an           
"incurrence" of such Indebtedness and an "Investment" by the Company or such    
Subsidiary (or both, if applicable) at the time of such designation; (B) such   
designation would be permitted under the "Limitation on Restricted Payments"    
covenants described below and (C) if applicable, the Incurrence of              
Indebtedness and the Investment referred to in clause (A) of this proviso       
would be permitted under the "Limitation on Indebtedness" and "Limitation on    
Restricted Payments" covenants described below.                                 

"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances  
to elect a least a majority of the board of directors, managers or trustees of  
any person (irrespective of whether or not, at the time, Capital Stock of any   
other class or classes shall have, or might have, voting power by reason of     
the happening of any contingency).                                              

"Wholly-Owned Subsidiary" means any Subsidiary of the Company of which 100% 
of the outstanding Capital Stock is owned by one or more Wholly-Owned           
Subsidiaries of the Company or by the Company and one or more Wholly-Owned      
Subsidiaries of the Company. For purposes of this definition, any directors'    
qualifying shares or investments by foreign nationals mandated by applicable    
law shall be disregarded in determining the ownership of a Subsidiary.          

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REVOLVING CREDIT FACILITY                                                       

The Company's Revolving Credit Facility with First Chicago NBD, Inc. (the   
"Bank") (the "Revolving Credit Facility") had a maximum borrowing availability  
up to $15 million. The Revolving Credit Facility expired October 31, 1997.      

Interest. Borrowings under the Revolving Credit Facility bear interest at a 
rate per annum equal to the sum of (i) the higher of the Bank's base rate or    
the Federal Funds Effective Rate plus one half of one percent (.5%) per annum   
and (ii) one quarter of one percent (.25%).                                     

Security. The Revolving Credit Facility is secured by collateral consisting 
of substantially all the assets of the Company.                                 

Events of Default. The occurrence of any one or more of the following events
shall constitute a default of the Company under the Revolving Credit Facility:  

 (a) any representation or warranty made by or on behalf of the Company to
the Bank under or in connection with the Revolving Credit Facility or any   
loan shall be materially false as of the date on which made;                

(b) nonpayment of the principal amount of any loan when due;            

(c) nonpayment of interest upon any loan or of any commitment fee within
five (5) days after the same becomes due;                                   

(d) failure of the Company to pay when due (subject to any applicable   
grace period) any material indebtedness or the default by the Company in    
the performance of any other term, provision or condition contained in any  
agreement (other than the Revolving Credit Facility ) under which any such  
indebtedness was created or is governed, the effect of which is to cause,   
or to permit the holder or holders of such indebtedness to cause, such      
indebtedness to become due prior to its stated maturity; or any such        
indebtedness shall be declared to be due and payable or required to be      
prepaid (other than by a regularly scheduled payment) prior to maturity     
thereof;                                                                    

(e) the Company shall (i) have an order for relief entered with respect 
to it under the Federal Bankruptcy Code, Title 11, United States Code,      
Sections 1 et. seq., (ii) not pay, or admit in writing its inability to     
pay, its debts generally as they become due, (iii) make an assignment for   
the benefit of creditors, (iv) apply for, seek, consent to, or acquiesce in 
the appointment of a receiver, custodian, trustee, examiner, liquidator or  
similar official for it or any substantial part of its property, (v)        
institute any proceeding seeking to adjudicate it bankrupt or insolvent, or 
seeking dissolution, winding up, liquidation, reorganization, arrangement,  
adjustment or composition of it or its debts under any law relating to      
bankruptcy, insolvency or reorganization or relief of debtors, or fail to   
file any answer or other pleading denying the material allegations of any   
such proceeding filed against it, (vi) take any corporate action to         
authorize or effect any of the foregoing actions set forth in this          
subparagraph, or (vii) fail to contest in good faith any appointment or     
proceeding described in subparagraph (f);                                   

(f) without the application, approval or consent of the Company, a      
receiver, trustee, examiner, liquidator or similar official shall be        
appointed for the Company or any substantial part of its property, or a     
proceeding described in clause (v) of subparagraph (e) shall be instituted  
against the Company, and such appointment continues undischarged or such    
proceeding continues undismissed or unstayed for a period of sixty (60)     
consecutive days; or                                                        

(g) The aggregate face amount of outstanding letters of credit issued on
the application of the Company shall exceed $2,000,000.                     

If any default described in paragraphs (e) or (f), above, occurs, the       
commitment of the Bank to make loans under the Revolving Credit Facility shall  
automatically terminate and any loans outstanding to the Company shall          
immediately become due and payable without any election or action on the part   
of the Bank. If any other Default occurs, the Bank may terminate or suspend     
the commitment of the Bank to make loans under the Revolving Credit Facility,   
or declare the loans outstanding to the Company to be due and payable,          
whereupon such loan shall become immediately due and payable, or both, without  
presentment, demand, protest or notice of any kind.                             

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PLAN OF DISTRIBUTION  

The Shares offered by the Selling Shareholders may be sold from time to time
by the Selling Shareholders, or by pledgees, donees, transferees or other       
successors in interest of the Selling Shareholders, at their sole discretion.   
Such sales may be made on the Shareholders, at their sole discretion. Such      
sales may be made on the NASDAQ National Market or otherwise at prices and on   
terms then prevailing or at prices related to the then current market price,    
or in negotiated transactions. The Shares offered by the Selling Shareholders   
are not being underwritten.                                                     

In general, the Shares may be sold by one or more of the following means:   
(a) a block trade in which the broker or dealer so engaged will attempt to      
sell the securities as agent but may position and resell a portion of the       
block as principal to facilitate the transaction; (b) purchases by a broker or  
dealer as principal and resale by such broker or dealer for its account         
pursuant to this Prospectus; (c) an exchange distribution in accordance with    
the rules of such exchange (if the securities are then listed on an exchange);  
(d) ordinary brokerage transactions and transactions in which the broker        
solicits purchasers; or (e) other securities transactions. In effecting sales,  
brokers or dealers engaged by the Selling Shareholders may arrange for other    
brokers or dealers to participate. Brokers or dealers will receive commissions  
or discounts from the Selling Shareholders in amounts to be negotiated          
immediately prior to the sale. No commissions or other fees shall be payable    
by the Company to any broker or dealer in connection with this offering. Such   
brokers or dealers and any other participating brokers or dealers may be        
deemed to be "underwriters' within the meaning of the Securities Act of 1933,   
as amended, in connection with such sales. The Company will pay the expenses    
of this offering, estimated at $   .                                            

TRANSFER AGENT AND REGISTRAR  

First Chicago Trust Company of New York will serve as transfer agent and    
registrar for the Common Stock.                                                 

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SHARES ELIGIBLE FOR FUTURE SALE 

Upon completion of the Offering, the Company will have 31,003,431           
outstanding shares of Common Stock and 2,086,630 shares of Common Stock         
subject to outstanding options, of which options to purchase 1,677,153 shares   
will then be exercisable. In addition, 2,322,847 shares of Common Stock are     
issuable upon exercise of options available for grant under the Stock Option    
Plan and 1,160,107 shares are issuable upon exercise of the Warrants. The       
234,889 shares of Common Stock sold in the Offering will be freely tradeable    
without restriction or further registration under the Securities Act. Pursuant  
to the Principal Shareholders Registration Rights Agreement, the Principal      
Shareholders or their permitted transferees are entitled to certain piggyback   
registration rights, and, in the event the Company becomes eligible to use a    
Form S-3 registration statement, two demand registration rights.                

These rights are generally subject to certain conditions and limitations,   
among them the right of the underwriters of an offering to limit the number of  
shares included in such registration in certain circumstances. The Principal    
Shareholders Registration Rights Agreement obligates the Company to pay all     
expenses of any such registration, other than underwriting discounts and        
commissions relating to the shares being sold on behalf of any Principal        
Shareholders and to indemnify the Principal Shareholders against certain        
liabilities, including liabilities under the Securities Act. Sales of           
restricted securities in the public market or the perception that such sales    
could occur could adversely affect the market price of the Common Stock.        

In general, under Rule 144 as currently in effect, a person (or persons     
whose shares are aggregated), including persons deemed to be "affiliates" of    
the Company, who has beneficially owned his or her shares for at least one      
year since the later of the date of the acquisition of the securities from the  
Company or from an affiliate is entitled to sell within any three-month period  
that number of restricted securities that does not exceed the greater of (i)    
1% of the then outstanding shares of securities of the same class or (ii) the   
average weekly trading volume of such securities during the four calendar       
weeks immediately preceding such sale, or the filing of notice of proposed      
sale, if required, subject to the availability of adequate current public       
information about the Company. After two years have elapsed since the later of  
the date the securities were acquired from the Company or from an affiliate of  
the Company, such shares may be sold without limitation by persons who are not  
affiliates of the Company at the time and have not been affiliates of the       
Company for at least three months under Rule 144(k).                            

Rule 701 under the Securities Act provides that, beginning 90 days after the
date of this Prospectus, shares of Common Stock acquired on the exercise of     
outstanding options prior to the date of this Prospectus may be resold by       
persons other than affiliates subject only to the manner of sale provisions of  
Rule 144, and by affiliates subject to all provisions of Rule 144 except its    
one-year minimum holding period. The Company intends to file one or more        
registration statements under the Securities Act to register the shares of      
Common Stock issued and reserved for issuance in compensatory arrangements and  
under the Stock Option Plan. Registration would permit the resale of such       
shares by non-affiliates and affiliates, subject to the lock-up described       
above, in the public market without restriction under the Securities Act.       

In addition, the Company intends to register on Form S-8 under the          
Securities Act 4,000,000 shares of Common Stock issuable under options subject  
to the Company's Stock Option Plan. Shares issued under the Stock Option Plan   
pursuant to such registration statement on Form S-8 (other than shares issued   
to affiliates) generally may be sold immediately in the public market, subject  
to vesting requirements and the lock-up agreements described below under        
"Underwriters."                                                                 

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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS  
OF COMMON STOCK 

General. The following discussion concerns the material United States       
federal income and estate tax consequences of the ownership and disposition of  
shares of Common Stock applicable to holders of such shares of Common Stock     
who are not U.S. persons. The discussion is based on current law, which is      
subject to change retroactively or prospectively, and is for general            
information only. The discussion does not address all aspects of United States  
federal income and estate taxation and does not address any aspects of state,   
local or foreign tax laws. The discussion does not consider any specific facts  
or circumstances that may apply to a particular investor. Accordingly,          
prospective investors are urged to consult their tax advisors regarding the     
current and possible future United States federal, state, local and non-U.S.    
income and other tax consequences of holding and disposing of shares of Common  
Stock.                                                                          

In general, a "Non-U.S. Holder" is any beneficial owner of Common Stock that
is not (i) a citizen or resident, as specifically defined for U.S. federal      
income tax purposes, of the United States, (ii) a corporation, partnership or   
any entity treated as a corporation or partnership for U.S. federal income tax  
purposes created or organized in the United States or under the laws of the     
United States or of any State thereof, (iii) any other entity, including an     
estate, whose income is includible in gross income for United States federal    
income tax purposes regardless of its source, or (iv) a trust whose             
administration is subject to the primary supervision of a U.S. court and which  
has one or more U.S. fiduciaries who have the authority to control all          
substantial decisions of the trust.                                             

Dividends. In general, dividends paid to a Non-U.S. Holder will be subject  
to United States withholding tax at a 30% rate (or a lower rate as may be       
specified by an applicable tax treaty) unless the dividends are (i)             
effectively connected with a trade or business carried on by the Non-U.S.       
Holder within the United States, and (ii) if a tax treaty applies,              
attributable to a United States permanent establishment maintained by the Non-  
U.S. Holder. Dividends effectively connected with such a trade or business or,  
if a tax treaty applies, attributable to such permanent establishment will      
generally not be subject to withholding (if the Non-U.S. Holder files certain   
forms annually with the payor of the dividend) but will generally be subject    
to United States federal income tax on a net income basis at regular graduated  
individual or corporate rates. In the case of a Non-U.S. Holder that is a       
corporation, such effectively connected income also may be subject to the       
branch profits tax (which is generally imposed on a foreign corporation on the  
deemed repatriation from the United States of effectively connected earnings    
and profits) at a 30% rate or such lower rate as may be specified by an         
applicable income tax treaty. The branch profits tax may not apply if the       
recipient is a qualified resident of certain countries with which the United    
States has an income tax treaty.                                                

To determine the applicability of a tax treaty providing for a lower rate of
withholding, dividends paid to an address in a foreign country are presumed     
under current Treasury Regulations to be paid to a resident of that country,    
unless the payor has definite knowledge that such presumption is not warranted  
or an applicable tax treaty (or United States Treasury Regulations thereunder)  
requires some other method for determining a Non-U.S. Holder's residence.       
However, under new regulations adopted by the U.S. Treasury on October 6,       
1997, dividends paid after December 31, 1998 to a non-U.S. Holder could be      
subject to backup withholding at a 31 percent rate, rather than at a 30         
percent rate or at a reduced rate under an income tax treaty, unless certain    
documentation procedures are complied with. Under current regulations, the      
Company must report annually to the United States Internal Revenue Service      
(the "IRS") and to each Non-U.S. Holder the amount of dividends paid to, and    
the tax withheld with respect to, each Non-U.S. Holder. These reporting         
requirements apply regardless of whether withholding was reduced or eliminated  
by an applicable tax treaty. Copies of these information returns also may be    
made available under the provisions of a specific treaty or agreement with the  
tax authorities of the country in which the Non-U.S. Holder resides.            

On October 6, 1997, the Treasury Department issued final rules with respect 
to withholding tax on income paid to foreign persons and related matters (the   
"New Withholding Regulations"). The New Withholding Regulations will generally  
be effective for payments made after December 31, 1998, subject to certain      
transition rules. Non-U.S. Holders that are subject to withholding are urged    
to consult their own tax advisors with respect to the New Withholding           
Regulations.                                                                    

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A Non-U.S. Holder that is eligible for a reduced rate of United States      
withholding tax pursuant to an income tax treaty may obtain a refund of any     
excess amounts currently withheld by filing an appropriate claim for refund     
with the IRS.                                                                   

Sale of Common Stock. Generally, a Non-U.S. Holder will not be subject to   
United States federal income tax, by withholding or otherwise, on any gain      
realized upon the sale or other disposition of such holder's shares of Common   
Stock unless (i) the gain is effectively connected with a trade or business     
carried on by the Non-U.S. Holder within the United States and, if a tax        
treaty applies, the gain is attributable to a permanent establishment           
maintained by the Non-U.S. Holder in the United States; (ii) the Non-U.S.       
Holder is an individual who holds the shares of Common Stock as a capital       
asset and is present in the United States for 183 days or more in the taxable   
year of the disposition, and either (a) such Non-U.S. Holder has a "tax home"   
(as specifically defined for U.S. federal income tax purposes) in the United    
States (unless the gain from disposition is attributable to an office or other  
fixed place of business maintained by such non-U.S. Holder in a foreign         
country and a foreign tax equal to at least 10% of such gain has been paid to   
a foreign country), or (b) the gain from the disposition is attributable to an  
office or other fixed place of business maintained by such Non-U.S. Holder in   
the United States; (iii) the Non-U.S. Holder is subject to tax pursuant to the  
provisions of U.S. tax law applicable to certain United States expatriates, or  
(iv) the Company is or has been during certain periods a "U.S. real property    
holding corporation" for U.S. federal income tax purposes (which the Company    
does not believe that it has been, currently is or is likely to become) and,    
assuming that the Common Stock is deemed for tax purposes to be "regularly      
traded on an established securities market," the Non-U.S. Holder held, at any   
time during the five-year period ending on the date of disposition (or such     
shorter period that such shares were held), directly or indirectly, more than   
five percent of the Common Stock.                                               

Estate Tax. Shares of Common Stock owned or treated as owned by an          
individual who is not a citizen or resident (as specially defined for United    
States federal estate tax purposes) of the United States at the time of death   
will be includible in the individual's gross estate for United States federal   
estate tax purposes, unless an applicable tax treaty provides otherwise, and    
may be subject to United States federal estate tax.                             

Backup Withholding and Information Reporting. As a general rule, under      
current United States federal income tax law, backup withholding tax (which     
generally is a withholding tax imposed at the rate of 31% on certain payments   
to persons that fail to furnish the information required under the U.S.         
information reporting requirements) and information reporting requirements      
apply to the actual and constructive payments of dividends. The United States   
backup withholding tax and information reporting requirements generally, under  
current regulations, will not apply to dividends paid on Common Stock to a      
Non-U.S. Holder at an address outside the United States that are either         
subject to the 30% withholding discussed above or that are not so subject       
because a tax treaty applies that reduces or eliminates such 30% withholding,   
unless the payer has knowledge that the payee is a U.S. person. Backup          
withholding and information reporting generally will apply to dividends paid    
to addresses inside the United States on shares of Common Stock to beneficial   
owners that are not recipients that are entitled to an exemption, as discussed  
above and that fail to provide in the manner required certain identifying       
information. However, under new regulations adopted by the U.S. Treasury on     
October 6, 1997, dividends paid after December 31, 1998 to a non-U.S. Holder    
could be subject to backup withholding at a 31 percent rate, rather than at a   
30 percent rate or at a reduced rate under an income tax treaty, unless         
certain documentation procedures are complied with. Non-U.S. Holders are urged  
to consult their own tax advisors concerning the effect of these new            
regulations.                                                                    

The payment of the proceeds from the disposition of shares of Common Stock  
to or through the United States office of a broker will be subject to           
information reporting and backup withholding unless the holder, under           
penalties of perjury, certifies, among other things, its status as a Non-U.S.   
Holder, or otherwise establishes an exemption. Generally, the payment of the    
proceeds from the disposition of shares of Common Stock to or through a non-    
U.S. office of a non-U.S. broker will not be subject to backup withholding and  
will not be subject to information reporting. In the case of the payment of     
proceeds from the disposition of shares of Common Stock to or through a non-    
U.S. office of a broker that is a U.S. person or a "U.S.-related person,"       
existing regulations require (i) backup withholding if the broker has actual    
knowledge that the owner is not a Non-U.S. Holder, and                          

(ii) information reporting on the payment unless the broker receives a      
statement from the owner, signed under penalties of perjury, certifying, among  
other things, its status as a Non-U.S. Holder, or the broker has                

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documentary evidence in its files that the owner is a Non-U.S. Holder and the   
broker has no actual knowledge to the contrary. For this purpose, a "U.S.-      
related person" is (i) a "controlled foreign corporation" for United States     
federal income tax purposes or (ii) a foreign person 50% or more of whose       
gross income from all sources for the three-year period ending with the close   
of its taxable year preceding the payment (or for such part of the period that  
the broker has been in existence) is derived from activities that are           
effectively connected with the conduct of a United States trade or business.    
The IRS recently proposed regulations addressing the withholding and            
information reporting rules which could affect the treatment of the payment of  
proceeds discussed above. Non-U.S. Holders should consult their tax advisors    
regarding the application of these rules to their particular situations, the    
availability of an exemption therefrom, the procedure for obtaining such an     
exemption, if available, and the possible application of the proposed           
regulations addressing the withholding and information reporting rules.         

Backup withholding is not an additional tax. Any amounts withheld from a    
payment to a Non-U.S. Holder under the backup withholding rules will be         
allowed as a credit against such holder's United States federal income tax      
liability, if any, and provided that such holder furnishes the IRS with the     
information entitling such holder to an exemption from or reduced rate of       
withholding, such holder would be entitled to a refund.                         

LEGAL MATTERS 

Certain legal matters in connection with the Common Stock offered hereby    
will be passed upon for the Company by Swidler & Berlin, Chartered,             
Washington, D.C. The validity of the issuance of the shares of Common Stock     
offered hereby will be passed upon for the Company by Marcus and Thompson,      
P.C.                                                                            

EXPERTS 

The consolidated financial statements of Telegroup, Inc. as of December 31, 
1995 and 1996, and for each of the years in the three-year period ended         
December 31, 1996, included herein and the registration statement in reliance   
upon the reports of KPMG Peat Marwick LLP, independent certified public         
accountants, included herein, and upon authority of said firm as experts in     
accounting and auditing.                                                        

MacIntyre & Co., who have audited the divisional financial statements of    
Fastnet U.K. Limited for the period from 1 October 1996 to 28 February 1997,    
have given and have not withdrawn their written consent to the inclusion        
herein of their auditors' report and the references thereto and to themselves   
in the form and context in which they are included.                             

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GLOSSARY OF TERMS 

accounting or settlement rate--The per minute rate negotiated between       
carriers in different countries for termination of international long distance  
traffic in, and return traffic to, the carriers' respective countries.          

call-reorigination                                                            

 traditional call-reorigination (also known as "callback")--A form of dial
up access that allows a user to access a telecommunications company's       
network by placing a telephone call, hanging up, and waiting for an         
automated callback. The callback then provides the user with dial tone      
which enables the user to initiate and complete a call.                     

transparent call-reorigination--Technical innovations have enabled      
telecommunications carriers to offer a "transparent" form of call           
reorigination without the usual "hang up" and "callback" whereby the call   
is automatically and swiftly processed by a programmed switch.              

call-through--The provision of international long distance service      
through conventional long distance or "transparent" call-reorigination.     

CLEC--Competitive Local Exchange Carrier.                                   

core markets--The Company's "core markets" are the U.S., Germany, the U.K., 
France, Switzerland, Hong Kong, Japan, the Netherlands, Australia and Sweden.   

Country Coordinators--Persons in the Company's markets responsible for      
coordinating Telegroup's operations, including sales, marketing, customer       
service and independent agent support. Telegroup currently has 28 Country       
Coordinators responsible for providing such support in 72 countries.            

CUG (Closed User Group)--A group of specified users, such as employees of a 
company, permitted by applicable regulations to access a private voice or data  
network, which access would otherwise be denied to them as individuals.         

dedicated or direct access--A means of accessing a network through the use  
of a permanent point-to-point circuit typically leased from a facilities-based  
carrier. The advantage of dedicated access is simplified premises-to-anywhere   
calling, faster call set-up times and potentially lower access and              
transmission costs (provided there is sufficient traffic over the circuit to    
generate economies of scale).                                                   

dial-up access--A form of service whereby access to a network is obtained by
dialing an international toll-free number or a paid local access number.        

distributed intelligence--The proprietary architecture supporting the TIGN  
which allows customer information, such as credit limits, language selection,   
waiting voice-mail and faxes, and speed dial numbers to be distributed to       
customers cost-effectively over a parallel data network wherever.               

European Union--Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the   
United Kingdom.                                                                 

facilities-based carrier--A carrier which transmits a significant portion of
its traffic over owned transmission facilities.                                 

fiber-optic--A transmission medium consisting of high-grade glass fiber     
through which light beams are transmitted carrying a high volume of             
telecommunications traffic.                                                     

IPLC (International Private Line Circuits)--Point-to-point permanent        
connections which can carry voice and data. IPLCs are owned and maintained by   
ITOs or third party resellers.                                                  

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IRU (Indefeasible Rights of Use)--The rights to use a telecommunications    
system, usually an undersea cable, with most of the rights and duties of        
ownership, but without the right to control or manage the facility and,         
depending upon the particular agreement, without any right to salvage or duty   
to dispose of the cable at the end of its useful life.                          

ISDN (Integrated Services Digital Network)--A hybrid digital network capable
of providing transmission speeds of up to 128 kilobits per second for both      
voice and data.                                                                 

ISR (International Simple Resale)--The use of international leased lines for
the resale of switched telephony services to the public, by-passing the         
current system of accounting rates.                                             

ITO (Incumbent Telecommunications Operator)--The dominant carrier or        
carriers in each country, often, but not always, government-owned or protected  
(alternatively referred to as the Postal, Telephone and Telegraph Company, or   
PTT).                                                                           

LEC (Local Exchange Carrier)--Companies from which the Company and other    
long distance providers must purchase "access services" to originate and        
terminate calls in the U.S.                                                     

local connectivity--Physical circuits connecting the switching facilities of
a telecommunications services provider to the interexchange and transmission    
facilities of a facilities-based carrier.                                       

local exchange--A geographic area determined by the appropriate regulatory  
authority in which calls generally are transmitted without toll charges to the  
calling or called party.                                                        

node--A specially configured multiplexer which provides the interface       
between the local PSTN where the node is located and the TIGN switch. A node    
collects and concentrates call traffic from its local area and transfers it to  
TIGN switches via private line for call processing. Nodes permit Telegroup to   
extend its network into a new geographic location by accessing the local PSTN   
without requiring the deployment of a switch.                                   

operating agreement--An agreement that provides for the exchange of         
international long distance traffic between correspondent international long    
distance providers that own facilities in different countries. These            
agreements provide for the termination of traffic in, and return traffic from,  
the international long distance providers' respective countries at a            
negotiated "accounting rate." Under a traditional operating agreement, the      
international long distance provider that originates more traffic compensates   
the corresponding long distance provider in the other country by paying an      
amount determined by multiplying the net traffic imbalance by the latter's      
share of the accounting rate.                                                   

PBX (Public Branch Exchange)--Switching equipment that allows connection of 
a private extension telephone to the PSTN or to a private line.                 

PNETs (Public Non-Exclusive Telecommunications Services) License--A license 
allowing the licensee to provide certain telecommunications services in Hong    
Kong. A PNETs licensee may not provide services the provision of which are      
reserved to Hong Kong Telecommunications International Limited.                 

PSTN (Public Switched Telephone Network)--A telephone network which is      
accessible by the public through private lines, wireless systems and pay        
phones.                                                                         

private line--A dedicated telecommunications connection between end user    
locations.                                                                      

resale--Resale by a provider of telecommunications services of services sold
to it by other providers or carriers on a wholesale basis.                      

Switching facility--A device that opens or closes circuits or selects the   
paths or circuits to be used for transmission of information. Switching is a    
process of interconnecting circuits to form a transmission path between users.  

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TIGN--The Telegroup Intelligent Global Network.                             

Transit/termination agreements--An agreement that provides for the exchange 
of international long distance traffic between international long distance      
providers, which agreement provides for the termination of traffic in one or    
more countries at negotiated termination costs. Such an agreement usually does  
not include an "accounting rate" and often is not limited to the termination    
of traffic in the home territories of the parties in the agreement.             

Value-Added Tax (VAT)--A consumption tax levied on end-consumers of goods   
and services in applicable jurisdictions.                                       

Voice Telephony--A term used by the EU, defined as the commercial provision 
for the public of the direct transport, enabling any user to use equipment      
connected to such a network termination point in order to communicate with      
another termination point. The term "voice telephony" is also used in the       
Prospectus generally to refer to the direct transport and switching of speech   
in real-time between public switched network termination points.                

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TABLE OF CONTENTS 

TELEGROUP, INC. AND SUBSIDIARIES

                                                                [Download Table]

                                                                            PAGE
                                                                            ----
                                                                                
Independent Auditors' Report..............................................  F-2 
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September      
 30, 1997 (unaudited).....................................................  F-3 
Consolidated Statements of Operations for the years ended December 31,          
 1994, 1995 and 1996 and the nine-month periods ended September 30, 1996        
 and 1997 (unaudited).....................................................  F-4 
Consolidated Statements of Shareholders' Equity (Deficit) for the years         
 ended December 31, 1994, 1995 and 1996 and the nine-month period ended         
 September 30, 1997 (unaudited)...........................................  F-5 
Consolidated Statements of Cash Flows for the years ended December 31,          
 1994, 1995 and 1996 and the nine-month periods ended September 30, 1996        
 and 1997 (unaudited).....................................................  F-6 
Notes to Consolidated Financial Statements................................  F-7 

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INDEPENDENT AUDITORS' REPORT  

The Board of Directors                                                          
Telegroup, Inc.:                                                                

We have audited the accompanying consolidated balance sheets of Telegroup,  
Inc. and subsidiaries as of December 31, 1995 and 1996, and the related         
consolidated statements of operations, shareholders' equity (deficit), and      
cash flows for each of the years in the three-year period ended December 31,    
1996. These consolidated financial statements are the responsibility of the     
Company's management. Our responsibility is to express an opinion on these      
consolidated financial statements based on our audits.                          

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

In our opinion, the consolidated financial statements referred to above     
present fairly, in all material respects, the financial position of Telegroup,  
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of its  
operations and its cash flows for each of the years in the three-year period    
ended December 31, 1996, in conformity with generally accepted accounting       
principles.                                                                     

                         KPMG Peat Marwick LLP

Lincoln, Nebraska                                                               
March 28, 1997, except as to note 1 (m)                                         
and the last paragraph of note 7                                                
which are as of July 8, 1997                                                    

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TELEGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS 

DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997 

                                                                [Download Table]

                                           DECEMBER 31,                         
                                      ----------------------                    
                                         1995        1996     SEPTEMBER 30, 1997
                                      ----------- ----------  ------------------
                                                                 (UNAUDITED)    
                                                                                
               ASSETS                                                           
Current assets:                                                                 
 Cash and cash equivalents..........  $ 4,591,399 14,155,013      58,215,248    
 Accounts receivable and unbilled                                               
  services, less allowance for                                                  
  credit losses of $2,100,000 in                                                
  1995, $3,321,119 in 1996, and                                                 
  $4,639,183 at September 30, 1997..   23,196,743 32,288,507      48,007,389    
 Income tax recoverable.............          --   1,796,792       2,924,478    
 Deferred taxes (note 8)............    1,134,730  1,392,058       1,639,066    
 Prepaid expenses and other assets..      110,325    245,271         757,508    
 Receivables from shareholders......       75,952     14,974          45,880    
 Receivables from employees.........       87,895     85,539         189,070    
                                      ----------- ----------     -----------    
 Total current assets...............   29,197,044 49,978,154     111,778,639    
                                      ----------- ----------     -----------    
Net property and equipment (note                                                
 5).................................    3,979,039 11,256,139      21,596,980    
                                      ----------- ----------     -----------    
Other assets:                                                                   
 Deposits and other assets..........      282,378    376,614         688,665    
 Goodwill, net of amortization of                                               
  $22,768 in 1996 and $96,520 at                                                
  September 30, 1997................          --   1,001,841       2,969,347    
 Capitalized software, net of amor-                                             
  tization (note 1e)................      117,051  1,906,655       1,873,946    
 Debt issuance costs, net of amorti-                                            
  zation (note 2)...................          --   1,437,004         750,000    
                                      ----------- ----------     -----------    
                                          399,429  4,722,114       6,281,958    
                                      ----------- ----------     -----------    
 Total assets.......................  $33,575,512 65,956,407     139,657,577    
                                      =========== ==========     ===========    
LIABILITIES AND SHAREHOLDERS' EQUITY                                            
Current liabilities:                                                            
 Accounts payable...................  $16,479,564 30,719,562      44,413,669    
 Accrued expenses...................    6,990,053  8,561,041      12,233,538    
 Unearned revenue...................          --      64,276         160,222    
 Income taxes payable...............    3,526,900        --              --     
 Note payable.......................    2,000,000        --       15,000,000    
 Customer deposits..................      515,434    602,940         717,224    
 Current portion of long-term debt                                              
  (note 2)..........................          --     232,596          92,194    
 Current portion of capital lease                                               
  obligations (note 6)..............      137,114    138,309         127,099    
 Due to shareholders................       25,881        --              --     
                                      ----------- ----------     -----------    
 Total current liabilities..........   29,674,946 40,318,724      72,743,946    
Deferred taxes (note 8).............      269,630    756,891         730,847    
Capital lease obligations (note 6)..      483,489    301,393         218,320    
Long-term debt (note 2).............          --  11,216,896      25,042,057    
Minority interest...................          --         --              --     
Shareholders' equity (note 7):                                                  
 Common stock, no par or stated val-                                            
  ue; 150,000,000 shares authorized,                                            
  issued and outstanding 24,651,989                                             
  in 1995, 26,211,578 in 1996 and                                               
  30,768,542 at September 30, 1997..          --         --              --     
 Additional paid-in capital.........        4,595 10,765,176      51,405,027    
 Retained earnings (deficit)........    3,142,852  2,599,530     (10,220,143)   
 Foreign currency translation ad-                                               
  justment..........................          --      (2,203)       (262,477)   
                                      ----------- ----------     -----------    
 Total shareholders' equity.........    3,147,447 13,362,503      40,922,407    
                                      ----------- ----------     -----------    
Commitments and contingencies (note                                             
 9)                                                                             
 Total liabilities and shareholders'                                            
  equity............................  $33,575,512 65,956,407     139,657,577    
                                      =========== ==========     ===========    

See accompanying notes to consolidated financial statements.

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TELEGROUP, INC. AND SUBSIDIARIES  

CONSOLIDATED STATEMENTS OF OPERATIONS 

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND  
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997  

                                                        [Enlarge/Download Table]

                                     DECEMBER 31,                     SEPTEMBER 30,       
                          -------------------------------------  ------------------------ 
                             1994         1995         1996         1996         1997     
                          -----------  -----------  -----------  -----------  ----------- 
                                                                       (UNAUDITED)        
                                                                                          
Revenues:                                                                                 
  Retail................  $68,713,965  128,138,947  179,146,795  128,827,926  169,720,131 
  Wholesale.............          --       980,443   34,060,714   18,950,715   68,757,955 
                          -----------  -----------  -----------  -----------  ----------- 
    Total revenues......   68,713,965  129,119,390  213,207,509  147,778,641  238,478,086 
Cost of revenues........   49,512,724   83,100,708  150,536,859  100,794,086  174,273,208 
                          -----------  -----------  -----------  -----------  ----------- 
  Gross profit..........   19,201,241   46,018,682   62,670,650   46,984,555   64,204,878 
                          -----------  -----------  -----------  -----------  ----------- 
Operating expenses:                                                                       
  Selling, general and                                                                    
   administrative ex-                                                                     
   penses...............   19,914,168   39,221,849   59,651,857   42,648,269   63,174,487 
  Depreciation and amor-                                                                  
   tization.............      300,784      654,966    1,881,619    1,158,124    3,208,063 
  Stock option based                                                                      
   compensation.........          --           --     1,032,646          --       256,785 
                          -----------  -----------  -----------  -----------  ----------- 
    Total operating ex-                                                                   
     penses.............   20,214,952   39,876,815   62,566,122   43,806,393   66,639,335 
                          -----------  -----------  -----------  -----------  ----------- 
    Operating income                                                                      
     (loss).............   (1,013,711)   6,141,867      104,528    3,178,162   (2,434,457)
                          -----------  -----------  -----------  -----------  ----------- 
Other income (expense):                                                                   
  Interest expense......     (112,152)    (120,604)    (578,500)    (200,209)  (2,134,691)
  Interest income.......      102,836      193,061      377,450      210,859      782,299 
  Foreign currency                                                                        
   transaction gain                                                                       
   (loss)...............       31,024     (101,792)    (147,752)     (56,688)    (587,291)
  Other.................      105,303      298,627      118,504       60,966      159,228 
                          -----------  -----------  -----------  -----------  ----------- 
Earnings (loss) before                                                                    
 income taxes and ex-                                                                     
 traordinary item.......     (886,700)   6,411,159     (125,770)   3,193,090   (4,214,912)
Income tax benefit (ex-                                                                   
 pense) (note 8)........      348,300   (2,589,700)       7,448   (1,143,538)   1,366,054 
Minority interest in                                                                      
 shares of earnings                                                                       
 (loss).................          --           --           --           --           --  
                          -----------  -----------  -----------  -----------  ----------- 
Earnings (loss) before                                                                    
 extraordinary item.....     (538,400)   3,821,459     (118,322)   2,049,552   (2,848,858)
Extraordinary item, loss                                                                  
 on extinguishment of                                                                     
 debt, net of income                                                                      
 taxes of $1,469,486....          --           --           --           --   (9, 970,815)
                          -----------  -----------  -----------  -----------  ----------- 
    Net earnings                                                                          
     (loss).............  $  (538,400)   3,821,459     (118,322)   2,049,552  (12,819,673)
                          ===========  ===========  ===========  ===========  =========== 
Per share amounts:                                                                        
  Earnings (loss) before                                                                  
   extraordinary item...        (0.02)        0.13        (0.00)        0.07        (0.10)
                          ===========  ===========  ===========  ===========  =========== 
  Net earnings (loss)...  $     (0.02)        0.13        (0.00)        0.07        (0.47)
                          ===========  ===========  ===========  ===========  =========== 
Weighted-average                                                                          
 shares.................   28,784,635   28,784,635   28,784,635   28,784,635   27,462,331 
                          ===========  ===========  ===========  ===========  =========== 

See accompanying notes to consolidated financial statements.  

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TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) 

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997

                                                        [Enlarge/Download Table]

                          COMMON STOCK                                                      
                        -----------------                                                   
                                                                     FOREIGN       TOTAL    
                                          ADDITIONAL   RETAINED     CURRENCY   SHAREHOLDERS'
                                           PAID-IN     EARNINGS    TRANSLATION    EQUITY    
                          SHARES   AMOUNT  CAPITAL     (DEFICIT)   ADJUSTMENT    (DEFICIT)  
                        ---------- ------ ----------  -----------  ----------- -------------
                                                                                            
Balances at January 1,                                                                      
 1994.................. 24,651,989  $--        4,595      384,793        --         389,388 
Net loss...............        --    --          --      (538,400)       --        (538,400)
                        ----------  ----  ----------  -----------   --------    ----------- 
Balances at December                                                                        
 31, 1994.............. 24,651,989   --        4,595     (153,607)       --        (149,012)
Dividends..............        --    --          --      (525,000)       --        (525,000)
Net earnings...........        --    --          --     3,821,459        --       3,821,459 
                        ----------  ----  ----------  -----------   --------    ----------- 
Balances at December                                                                        
 31, 1995.............. 24,651,989   --        4,595    3,142,852        --       3,147,447 
Dividends..............        --    --          --      (425,000)       --        (425,000)
Net loss...............        --    --          --      (118,322)       --        (118,322)
Issuance of common                                                                          
 stock.................  1,297,473   --       52,366          --         --          52,366 
Notes receivable from                                                                       
 shareholders for com-                                                                      
 mon stock.............        --    --      (52,366)         --         --         (52,366)
Shares issued in con-                                                                       
 nection with business                                                                      
 combinations (note                                                                         
 3)....................    262,116   --      573,984          --         --         573,984 
Compensation expense in                                                                     
 connection with stock                                                                      
 option plan (note 7)..        --    --    1,032,646          --         --       1,032,646 
Warrants issued in con-                                                                     
 nection with the Pri-                                                                      
 vate Offering (note                                                                        
 7)....................        --    --    9,153,951          --         --       9,153,951 
Change in foreign cur-                                                                      
 rency translation.....        --    --          --           --      (2,203)        (2,203)
                        ----------  ----  ----------  -----------   --------    ----------- 
Balances at December                                                                        
 31, 1996.............. 26,211,578   --   10,765,176    2,599,530     (2,203)    13,362,503 
Net loss (unaudited)...        --    --          --   (12,819,673)       --     (12,819,673)
Issuance of shares, net                                                                     
 of offering expenses                                                                       
 (unaudited)...........  4,450,000   --   39,825,343          --         --      39,825,343 
Shares issued in con-                                                                       
 nection with business                                                                      
 combination (unau-                                                                         
 dited)................     40,000   --      470,000          --         --         470,000 
Compensation expense in                                                                     
 connection with stock                                                                      
 option plan (unau-                                                                         
 dited)................        --    --      256,785          --         --         256,785 
Issuance of shares for                                                                      
 options exercised (un-                                                                     
 audited)..............     66,964   --       87,723          --         --          87,723 
Change in foreign cur-                                                                      
 rency translation (un-                                                                     
 audited)..............        --    --          --           --    (260,274)      (260,274)
                        ----------  ----  ----------  -----------   --------    ----------- 
Balances at September                                                                       
 30, 1997 (unaudited).. 30,768,542  $--   51,405,027  (10,220,143)  (262,477)    40,922,407 
                        ==========  ====  ==========  ===========   ========    =========== 

See accompanying notes to consolidated financial statements.

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TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997

                                                        [Enlarge/Download Table]

                                    DECEMBER 31,                    SEPTEMBER 30,       
                         -------------------------------------  ----------------------- 
                            1994         1995         1996         1996        1997     
                         -----------  -----------  -----------  ----------  ----------- 
                                                                     (UNAUDITED)        
                                                                                        
Cash flows from                                                                         
 operating activities:                                                                  
 Net earnings (loss)...  $  (538,400)   3,821,459     (118,322)  2,049,552  (12,819,673)
 Adjustments to                                                                         
  reconcile net                                                                         
  earnings (loss) to                                                                    
  net cash provided by                                                                  
  operating                                                                             
  activities:                                                                           
 Depreciation and                                                                       
  amortization.........      300,784      654,966    1,881,619   1,158,124    3,208,063 
 Deferred income                                                                        
  taxes................     (198,200)    (937,200)     229,933     362,790     (273,052)
 Loss on                                                                                
  extinguishment of                                                                     
  debt.................          --           --           --          --    10,040,301 
 Loss on sale of                                                                        
  equipment............        4,422      261,241          --          --           --  
 Provision for credit                                                                   
  losses on accounts                                                                    
  receivable...........    1,056,781    3,981,525    5,124,008   3,730,892    6,384,001 
 Accretion of debt                                                                      
  discount.............          --           --        48,077         --       364,455 
 Stock option based                                                                     
  compensation                                                                          
  expense..............          --           --     1,032,646         --       256,785 
Changes in operating                                                                    
 assets and                                                                             
 liabilities, excluding                                                                 
 the effects of                                                                         
 business combinations:                                                                 
 Accounts receivable...   (8,450,053) (14,571,500) (14,199,095) (9,753,315) (21,791,926)
 Prepaid expenses and                                                                   
  other assets.........        1,603      145,656     (134,946)    (86,267)    (462,267)
 Deposits and other                                                                     
  assets...............       28,669      157,762      (80,001)    187,565   (1,650,196)
 Accounts payable and                                                                   
  accrued expenses.....    8,860,164    8,375,566   16,292,448  10,510,992   16,826,408 
 Income taxes..........          --     3,526,900   (5,323,692) (4,202,227)  (1,295,174)
 Unearned revenue......          --           --        64,276      41,986       95,946 
 Customer deposits.....      298,418      144,961       87,506      82,978      114,284 
                         -----------  -----------  -----------  ----------  ----------- 
   Net cash provided by                                                                 
    (used in) operating                                                                 
    activities.........    1,364,188    5,561,336    4,904,457   4,083,070   (1,002,045)
                         -----------  -----------  -----------  ----------  ----------- 
Cash flows from                                                                         
 investing activities:                                                                  
 Purchases of                                                                           
  equipment............   (1,056,430)  (2,651,823)  (9,067,923) (6,263,952) (12,463,348)
 Proceeds from sale of                                                                  
  equipment............       13,815        9,543          --          --           --  
 Capitalization of                                                                      
  software.............          --      (117,051)  (1,789,604) (1,326,858)    (306,373)
 Cash paid in business                                                                  
  combinations, net of                                                                  
  cash acquired........          --           --      (468,187)   (468,187)    (420,956)
 Net change in                                                                          
  receivables from                                                                      
  shareholders and                                                                      
  employees............      342,416      (58,464)      63,334    (202,003)    (134,437)
                         -----------  -----------  -----------  ----------  ----------- 
   Net cash used in                                                                     
    investing                                                                           
    activities.........     (700,199)  (2,817,795) (11,262,380) (8,261,000) (13,325,114)
                         -----------  -----------  -----------  ----------  ----------- 
Cash flows from                                                                         
 financing activities:                                                                  
 Net payments on notes                                                                  
  payable..............          --           --    (2,000,000) (2,000,000)         --  
 Proceeds from                                                                          
  issuance                                                                              
  (prepayment) of                                                                       
  Private Offering.....          --           --    20,000,000         --   (20,000,000)
 Debt issuance costs...          --           --    (1,450,281)        --      (750,000)
 Dividends paid........          --           --      (950,000)        --           --  
 Net proceeds from                                                                      
  line of credit.......          --           --           --    4,800,000   15,000,000 
 Net proceeds from                                                                      
  issuance of stock....          --           --           --          --    39,825,343 
 Net proceeds from                                                                      
  options exercised....          --           --           --          --        87,723 
 Net proceeds from                                                                      
  long-term                                                                             
  borrowings...........    1,000,000          --       530,803   1,254,596   24,578,885 
 Payments on capital                                                                    
  lease obligations....      (42,926)    (112,863)    (180,901)   (151,948)     (94,283)
 Net change in due to                                                                   
  shareholders.........          --        (2,119)     (25,881)    (25,881)         --  
                         -----------  -----------  -----------  ----------  ----------- 
   Net cash (used in)                                                                   
    provided by                                                                         
    financing                                                                           
    activities.........      957,074     (114,982)  15,923,740   3,876,767   58,647,668 
                         -----------  -----------  -----------  ----------  ----------- 
Effect of exchange rate                                                                 
 changes on cash.......          --           --        (2,203)       (730)    (260,274)
                         -----------  -----------  -----------  ----------  ----------- 
Net increase (decrease)                                                                 
 in cash and cash                                                                       
 equivalents...........    1,621,063    2,628,559    9,563,614    (301,893)  44,060,235 
                         -----------  -----------  -----------  ----------  ----------- 
Cash and cash                                                                           
 equivalents at                                                                         
 beginning of year.....      341,777    1,962,840    4,591,399   4,591,399   14,155,013 
                         -----------  -----------  -----------  ----------  ----------- 
Cash and cash                                                                           
 equivalents at end of                                                                  
 year..................  $ 1,962,840    4,591,399   14,155,013   4,289,506   58,215,248 
                         ===========  ===========  ===========  ==========  =========== 
Supplemental cash flow                                                                  
 disclosures:                                                                           
 Dividends declared....          --   $   525,000      425,000     425,000          --  
                         ===========  ===========  ===========  ==========  =========== 
 Common stock issued                                                                    
  in connection with                                                                    
  business                                                                              
  combinations.........          --           --   $   573,984     573,984      470,000 
                         ===========  ===========  ===========  ==========  =========== 
 Common stock issued                                                                    
  in consideration for                                                                  
  notes receivable.....          --           --        52,366      52,366          --  
                         ===========  ===========  ===========  ==========  =========== 
 Equipment acquired                                                                     
  under capital                                                                         
  lease................  $   480,007       87,553          --          --           --  
                         ===========  ===========  ===========  ==========  =========== 
 Interest paid.........  $   112,152      120,604      356,270     200,209    2,356,921 
                         ===========  ===========  ===========  ==========  =========== 
 Taxes paid............          --           --     5,164,634   5,040,634        2,622 
                         ===========  ===========  ===========  ==========  =========== 

See accompanying notes to consolidated financial statements.

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TELEGROUP, INC. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1997 
(INFORMATION AS OF AND FOR THE NINE-MONTH PERIODSENDED SEPTEMBER 30, 1996 AND 
1997 IS UNAUDITED)  

(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES                      

(a) Nature of Business                                                        

Telegroup, Inc. and subsidiaries (the Company) is a provider of domestic and
international telecommunications services. Telegroup's revenues are derived     
from the sale of telecommunications to retail customers, typically residential  
users and small to medium-sized business and wholesale customers, typically     
telecommunications carriers. The Company's customers are principally located    
in the United States, Europe and the Pacific Rim which consists of Asia,        
Australia and New Zealand. In both the retail and wholesale aspects of its      
business, the Company extends credit to customers on an unsecured basis with    
the risk of loss limited to outstanding amounts.                                

The Company markets its services through a worldwide network of independent 
agents and supervisory "country coordinators". The Company extends credit to    
its sales representatives and country coordinators on an unsecured basis with   
the risk of loss limited to outstanding amounts, less commissions payable to    
the representatives and coordinators.                                           

A summary of the Company's significant accounting policies follows:         

(b) Basis of Presentation                                                     

The accompanying consolidated financial statements have been prepared in    
accordance with accounting principles generally accepted in the United States,  
and include the accounts of the Company and its wholly-owned subsidiaries.      

The financial information as of September 30, 1997 and for the nine-month   
periods ended September 30, 1996 and 1997 is unaudited and has been prepared    
in conformity with generally accepted accounting principles and includes all    
adjustments, in the opinions of management, necessary to a fair presentation    
of the results of operations for the interim periods presented. Such            
adjustments are, in the opinion of management, of a normal, recurring nature.   

All significant intercompany accounts and transactions have been eliminated 
in consolidation.                                                               

(c) Cash Equivalents                                                          

The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. At December 31, 1996 and        
September 30, 1997 cash equivalents consisted of a certificate of deposit in    
the amount of $60,000 and various government securities in the amount of        
$25,030,700, respectively. There were no cash equivalents at December 31,       
1995.                                                                           

(d) Property and Equipment                                                    

Property and equipment are stated at cost. Equipment held under capital     
leases is stated at the lower of the fair value of the asset or the net         
present value of the minimum lease payments at the inception of the lease.      
Depreciation is provided using the straight-line method over the useful lives   
of the assets owned and the related lease term for equipment held under         
capital leases.                                                                 

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TELEGROUP, INC. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(e) Capitalized Software Development Costs                                    

The Company capitalizes software costs incurred in the development of its   
telecommunications switching software, billing systems and other support        
platforms. The Company capitalizes only direct labor costs incurred in the      
development of internal use software. Capitalization begins at achievement of   
technological feasibility and ends when the software is placed in service.      
Amortization of capitalized software will be provided using the straight-line   
method over the software's estimated useful life, which ranges from 3 to 5      
years. There was no amortization during 1995 or 1996 as the software had not    
yet been placed in service. For the nine-month period ended September 30,       
1997, amortization of software development costs totalled $339,082.             

(f) Stock-Based Compensation                                                  

The Company accounts for its stock-based employee compensation plan using   
the intrinsic value based method prescribed by Accounting Principles Board      
Opinion No. 25, Accounting for Stock Issued to Employees, and related           
Interpretation (APB No. 25). The Company has provided pro forma disclosures as  
if the fair value based method of accounting for these plans, as prescribed by  
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for      
Stock-Based Compensation (SFAS No. 123), had been applied.                      

(g) Impairment of Long-Lived Assets                                           

Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for 
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of     
(SFAS No. 121), which requires that the long-lived assets and certain           
identifiable intangibles, held and used by an entity be reviewed for            
impairment whenever events or changes in circumstances indicate that the        
carrying value of an asset may not be recoverable. An impairment loss is        
recognized when estimated undiscounted future cash flows expected to be         
generated by the asset is less than its carrying value. Measurement of the      
impairment loss is based on the fair value of the asset, which is generally     
determined using valuation techniques such as the discounted present value of   
expected future cash flows. The adoption of SFAS No. 121 had no effect on the   
consolidated financial statements of the Company.                               

(h) Other Assets                                                              

Goodwill results from the application of the purchase method of accounting  
for business combinations. Amortization is provided using the straight-line     
method over a maximum of 15 years. Impairment is determined pursuant to the     
methodology in SFAS No. 121.                                                    

(i) Income Taxes                                                              

The Company accounts for income taxes under the provisions of SFAS No. 109, 
Accounting for Income Taxes (SFAS No. 109). Under the asset and liability       
method of SFAS No. 109, deferred tax assets and liabilities are recognized for  
the future tax consequences attributable to differences between the financial   
statement carrying amounts of existing assets and liabilities and their         
respective tax bases. Deferred tax assets and liabilities are measured using    
enacted tax rates expected to apply to taxable income in the years in which     
those temporary differences are expected to be recovered or settled. Under      
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in  
tax rates is recognized in income in the period that includes the enactment     
date.                                                                           

(j) Estimates                                                                 

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 at the   
date of the financial statements and the reported amounts of revenue and        
expenses during the reporting period. Actual amounts could differ from those    
estimates.                                                                      

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TELEGROUP, INC. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(k) Business and Credit Concentration                                         

Financial instruments which potentially expose the Company to a             
concentration of credit risk, as defined by SFAS No. 105, Disclosure of         
Information about Financial Instruments with Off-Balance-Sheet Risk and         
Financial Instruments with Concentrations of Credit Risk, consist primarily of  
accounts receivable. At December 31, 1996 and September 30, 1997, the           
Company's accounts receivable balance from customers in countries outside of    
the United States was approximately $18,100,000 and $34,500,000, respectively,  
with an associated reserve for credit losses of $2,400,000 and $3,400,000,      
respectively. At December 31, 1996 and September 30, 1997, approximately 3%     
and 2%, respectively of the international accounts receivable balance is        
collateralized by deposits paid by a portion of its international customers     
upon the initiation of service.                                                 

(l) Foreign Currency Contracts                                                

During 1996, the Company began to use foreign currency contracts to hedge   
foreign currency risk associated with its international accounts receivable     
balances. Gains or losses pursuant to these foreign currency contracts are      
reflected as an adjustment of the carrying value of the hedged accounts         
receivable. At December 31, 1996 and September 30, 1997, the Company had no     
material deferred hedging gains or losses.                                      

(m) Common Stock and Earnings (Loss) Per Share                                

Earnings (loss) per share have been computed using the weighted-average     
number of shares of common stock outstanding during each period as adjusted     
for the effects of the Securities and Exchange Commission Staff Accounting      
Bulletin No. 83. Accordingly, options and warrants to purchase common stock     
granted within one year of the Company's initial public offering, which have    
exercise prices below the assumed initial public offering price per share,      
have been included in the calculation of common equivalent shares, using the    
treasury stock method, as if they were outstanding for all periods presented.   
Common stock equivalents, which includes options and convertible subordinated   
notes, are not included in the loss per share calculation as their effect is    
anti-dilutive. Additionally, common share amounts have been adjusted to         
reflect the stock split of approximately 5.48-for-1 and reclassification of     
the Company's Class A and Class B common stock into a single class of common    
stock which will occur immediately prior to the effectiveness of the            
Registration Statement.                                                         

For the nine-month period ended September 30, 1997, earnings per common     
share has been computed under the provisions of Accounting Principles Board     
Opinion No. 15, Earnings per Share.                                             

(n) Revenues, Cost of Revenues and Commissions Expense                        

Revenues from retail telecommunications services are recognized when        
customer calls are completed. Revenues from wholesale telecommunications        
services are recognized when the wholesale carrier's customers' calls are       
completed. Cost of retail and wholesale revenues is based primarily on the      
direct costs associated with owned and leased transmission capacity and the     
cost of transmitting and terminating traffic on other carriers' facilities.     
The Company does not differentiate between the cost of providing transmission   
services on a retail or wholesale basis. Commissions paid to acquire customer   
call traffic are expensed in the period when associated call revenues are       
recognized.                                                                     

(o) Prepaid Phone Cards                                                       

Substantially all the prepaid phone cards sold by the Company have an       
expiration date of 24 months after issuance or six months after last use. The   
Company records the net sales price as deferred revenue when cards are sold     
and recognizes revenue as the ultimate consumer utilizes calling time.          
Deferred revenue relating to unused calling time remaining at each card's       
expiration is recognized as revenue upon the expiration of such card.           

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TELEGROUP, INC. AND SUBSIDIARIES  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(p) Foreign Currency Translation                                              

The functional currency of the Company is the United States (U.S.) dollar.  
The functional currency of the Company's foreign operations generally is the    
applicable local currency for each wholly-owned foreign subsidiary. Assets and  
liabilities of its foreign subsidiaries are translated at the spot rate in      
effect at the applicable reporting date, and the combined statements of         
operations and the Company's share of the results of operations of its foreign  
subsidiaries are translated at the average exchange rates in effect during the  
applicable period. The resulting unrealized cumulative translation adjustment   
is recorded as a separate component of equity.                                  

(q) Fair Value of Financial Instruments                                       

The fair values of cash and cash equivalents, receivables, accounts payable 
and lease obligations are estimated to approximate carrying value due to the    
short-term maturities of these financial instruments. The carrying value of     
the long-term debt approximates fair value as the debt was secured primarily    
during November 1996 at rates consistent with those in effect at December 31,   
1996 and September 30, 1997.                                                    

(r) Reclassifications                                                         

Certain amounts have been reclassified for comparability with the 1996      
presentation.                                                                   

(2) DEBT                                                                        

Long-term debt at December 31, 1996 and September 30, 1997 is shown below:  

                                                                [Download Table]

                                                 DECEMBER 31,  SEPTEMBER 30,
                                                     1996          1997     
                                                 ------------  -------------
                                                                            
12% senior subordinated notes, net of discount,                             
 paid in September 1997........................  $10,894,126           --   
8.0% convertible subordinated notes, due April                              
 15, 2005, unsecured...........................          --     25,000,000  
8.5% note payable, due monthly through fiscal                               
 2000, secured by vehicle......................       19,003        12,493  
10.8% note payable, due monthly through fiscal                              
 1998, secured by equipment financed...........      160,628       108,327  
12.0% note payable, paid in 1997...............       74,319           --   
12.0% note payable, paid in 1997...............      276,853           --   
6.85% note payable, due monthly through fiscal                              
 1999, unsecured...............................       14,138         9,291  
8.0% note payable, due monthly through fiscal                               
 1998, unsecured...............................       10,425         4,140  
                                                 -----------    ----------  
                                                  11,449,492    25,134,251  
Less current portion...........................     (232,596)      (92,194) 
                                                 -----------    ----------  
                                                 $11,216,896    25,042,057  
                                                 ===========    ==========  

There was no long-term debt at December 31, 1995.                           

On November 27, 1996, the Company completed a private placement (Private    
Offering) of 12% Senior Subordinated Notes (Note) for gross proceeds of         
$20,000,000 which is due and payable on November 27, 2003. Net proceeds from    
the Private Offering, after issuance costs of $1,450,281, were $18,549,719. In  
connection with the Private Offering, the Company issued 20,000 warrants to     
purchase 1,160,107 of the Company's common stock (see note 7).                  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

The Note was originally recorded at $10,846,049 (a yield of 26.8%), which   
represents the $20,000,000 in proceeds less the $9,153,951 value assigned to    
the detachable warrants, which is included in additional paid-in capital. The   
value of the warrants was based on a valuation performed by the Company's       
independent financial advisors. The value assigned to the warrants is being     
accreted to the debt using the interest method over 7 years. The accretion of   
the value assigned to the warrants is included in interest expense in the       
accompanying consolidated financial statements.                                 

 The Company may redeem the Note in whole or in part, at the redemption prices
set forth in the agreement plus unpaid interest, if any, and a prepayment fee   
of $1,400,000, if applicable, at the date of redemption. The Note indenture     
contains certain covenants which provide for limitations on indebtedness,       
dividend payments, changes in control, and certain other business transactions. 

The Company had a credit agreement with a bank which provided for up to     
$5,000,000 in committed credit at December 31, 1996. On September 12, 1997, the 
Company entered into a $15 million revolving credit facility (the "Facility")   
which replaced the previous credit facility. The Facility expired October 31,   
1997 and was secured by the Company's accounts receivable and other assets.     
Amounts outstanding under the Facility bear interest at a fluctuating rate      
which was 8.75% at September 30, 1997. There were no borrowings under the       
credit agreement at December 31, 1996 and $15,000,000 borrowed under the        
Facility at September 30, 1997.                                                 

The following is a schedule by years of future minimum debt service         
requirements as of December 31, 1996 and September 30, 1997:                    

                                                                [Download Table]

                                                  DECEMBER 31,  SEPTEMBER 30,
                                                      1996          1997     
                                                  ------------  -------------
                                                                             
1997............................................. $   232,596        92,194  
1998.............................................     229,684        41,250  
1999.............................................      91,271           807  
2000.............................................       1,815           --   
2001.............................................         --            --   
Later years......................................  20,000,000    25,000,000  
                                                  -----------    ----------  
                                                   20,555,366    25,134,251  
Less unaccreted discount on the 12% note.........  (9,105,874)          --   
                                                  -----------    ----------  
                                                  $11,449,492    25,134,251  
                                                  ===========    ==========  

On September 5, 1997, the Company prepaid in full all of its outstanding    
senior subordinated notes. The Company paid $21,400,000, which included         
$20,000,000 in principal and $1,400,000 for a prepayment penalty. In addition,  
the Company recognized a loss of $8,741,419 and $1,298,882 for the write-off of 
the unamortized original issue discount and debt issuance costs, respectively.  
The early extinguishment of the senior subordinated notes is reflected on the   
statement of operations as an extraordinary item, net of income taxes.          

On September 30, 1997, the Company issued $25 million in aggregate principal
amount of convertible subordinated notes due April 15, 2005. The net proceeds   
from the issuance of the convertible notes were approximately $24.3 million.    

The convertible notes are unsecured obligations of the Company and are      
subordinated to all existing and future senior indebtedness of the Company. The 
convertible notes bear interest at 8% per annum. The convertible notes are      
convertible into shares of common stock of the Company at any time on or before 
April 15, 2005, unless previously redeemed, at a conversion price of $12.00 per 
share.                                                                          

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

The convertible notes are redeemable, in whole or in part, at the option of 
the Company, at any time on or after October 15, 2000 at redemption prices      
(expressed as a percentage of the principal amount) declining annually from     
104.0% beginning October 15, 2000 to 100.0% beginning on October 15, 2003 and   
thereafter, together with accrued interest to the redemption date and subject   
to certain conditions.                                                          

The convertible note indenture places certain restrictions on the ability of
the Company and its subsidiaries to (i) incur additional indebtedness, (ii)     
make restricted payments (dividends, redemptions and certain other payments),   
(iii) incur liens, (iv) enter into mergers, consolidations or acquisitions,     
(v) sell or otherwise dispose of property, business or assets, (vi) issue and   
sell preferred stock of a subsidiary and (vii) engage in transactions with      
affiliates.                                                                     

(3) BUSINESS COMBINATIONS                                                       

On August 21, 1996, the Company purchased TeleContinent, S.A. for $200,000. 
Also on August 21, 1996, the Company purchased Telegroup South Europe, Inc.     
Consideration for the purchase was $1,031,547 and 262,116 shares of common      
stock of the Company valued at $573,984, for total consideration of             
$1,605,531. The value of the common stock was determined by management based    
on information obtained from the Company's independent financial advisors.      

The acquisitions have been accounted for using the purchase method of       
accounting and, accordingly, the net assets and results of operations are       
included in the consolidated financial statements from the date of              
acquisition. The aggregate purchase price of the acquisitions was allocated     
based on fair values as follows:                                                

                                                                [Download Table]
                                                                             
Current assets................................................... $  794,452 
Property and equipment...........................................     54,571 
Goodwill.........................................................  1,024,609 
Current liabilities..............................................    (68,101)
                                                                  ---------- 
  Total.......................................................... $1,805,531 
                                                                  ========== 

Pro forma operating results of the Company, assuming these acquisitions were
consummated on January 1, 1994, do not significantly differ from reported       
amounts.                                                                        

On August 14, 1997, the Company acquired 60 percent of the common stock of, 
and a controlling interest in, PCS Telecom, Inc. ("PCS Telecom") for            
$1,340,000 in cash and 40,000 shares of unregistered common stock valued at     
$470,000, for total consideration of $1,810,000. PCS Telecom is a developer     
and manufacturer of state of the art, feature-rich, calling card platforms      
used by the Company and numerous other companies.                               

The acquisition has been accounted for using the purchase method of         
accounting and, accordingly, the net assets and results of operations are       
included in the consolidated financial statements from the date of              
acquisition. The aggregate purchase price of the acquisition was allocated      
based on fair values as follows:                                                

                                                                [Download Table]
                                                                             
Current assets.................................................. $ 1,281,826 
Property and equipment..........................................     534,600 
Goodwill........................................................   2,041,258 
Current liabilities.............................................  (2,047,684)
                                                                 ----------- 
  Total......................................................... $ 1,810,000 
                                                                 =========== 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

Pro forma operating results of the Company, assuming the acquisition was    
consummated on January 1, 1995 would have been as follows:                      

                                                                [Download Table]

                                              PRO FORMA            PRO FORMA  
                                             DECEMBER 31,        SEPTEMBER 30,
                                       ------------------------  -------------
                                           1995        1996          1997     
                                       ------------ -----------  -------------
                                                                              
Revenue............................... $130,545,090 216,488,287   239,989,539 
                                       ============ ===========   =========== 
Income before extraordinary item......    3,799,274    (181,282)   (2,839,205)
                                       ============ ===========   =========== 
Net income (loss).....................    3,799,274    (181,282)  (12,810,020)
                                       ============ ===========   =========== 
Earnings (loss) per share before ex-                                          
 traordinary item.....................         0.13       (0.01)        (0.10)
                                       ============ ===========   =========== 
Net earnings (loss) per share.........         0.13       (0.01)        (0.47)
                                       ============ ===========   =========== 

(4) RELATED PARTIES                                                             

During 1994, 1995, and a portion of 1996, the Company had a management      
agreement with an affiliate owned by certain shareholders of the Company        
whereby it paid a management fee, determined annually, plus an incentive fee    
based upon performance. Amounts paid under this agreement totaled $1,155,000,   
$1,334,000 and $415,000 during 1994, 1995 and 1996, respectively. The           
management agreement was terminated on May 15, 1996.                            

(5) PROPERTY AND EQUIPMENT                                                      

Property and equipment, including assets owned under capital leases of      
$813,790 in 1995 and $612,278 as of December 31, 1996 and September 30, 1997,   
is comprised of the following:                                                  

                                                                [Download Table]

                                            DECEMBER 31,                       
                                USEFUL ---------------------- SEPTEMBER 30,    
                                LIVES     1995       1996         1997         
                                ------ ---------- ----------- -------------    
                                                                               
Land..........................    --   $   34,290      88,857      155,708     
Building and improvements.....   2-20         --      298,483      644,407     
Furniture, fixtures and office                                                 
 equipment....................    5-7     172,016     327,368      617,776     
Computer equipment............      5   2,363,954   5,021,884    9,040,093     
Network equipment.............      5   2,409,848   8,344,824   16,287,330     
Automobiles...................      5      62,055     104,260      124,334     
                                       ---------- -----------  -----------  ---
                                        5,042,163  14,185,676   26,869,648     
Less accumulated depreciation,                                                 
 including amounts applicable                                                  
 to assets acquired under cap-                                                 
 ital leases of $338,665 in                                                    
 1995, $269,098 in 1996 and                                                    
 $273,573 as of September 30,                                                  
 1997.........................          1,063,124   2,929,537    5,272,668     
                                       ---------- -----------  -----------     
Net property and equipment....         $3,979,039  11,256,139   21,596,980     
                                       ========== ===========  ===========     

 Property and equipment includes approximately $800,000 of equipment which has
not been placed in service at December 31, 1996 and, accordingly, is not being  
depreciated. The majority of this amount is related to new network              
construction.                                                                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

(6) LEASES                                                                      

The Company leases certain network equipment under capital leases and leases
office space under operating leases. Future minimum lease payments under these  
lease agreements for each of the next five years are summarized as shown        
below.                                                                          

                                                                [Download Table]

                                                          CAPITAL   OPERATING
                                                           LEASES    LEASES  
                                                          --------  ---------
                                                                             
Year ending December 31:                                                     
  1997................................................... $187,421    860,777
  1998...................................................  164,626    527,175
  1999...................................................  143,120    437,981
  2000...................................................   43,149    437,160
  2001...................................................      --     106,630
  Thereafter.............................................      --         -- 
                                                          --------  ---------
    Total minimum lease payments.........................  538,316  2,369,723
                                                                    =========
  Less amount representing interest......................  (98,614)          
                                                          --------           
                                                          $439,702           
                                                          ========           

As operating leases expire, it is expected that they will be replaced with  
similar leases. Rent expense under operating leases totaled $224,504, $306,933  
and $682,630 for the years ended December 31, 1994, 1995 and 1996,              
respectively, and $414,158 and $1,004,558 for the nine-month periods ended      
September 30, 1996 and 1997, respectively.                                      

(7) SHAREHOLDERS' EQUITY                                                        

Initial Public Offering                                                       

On July 14, 1997, the Company consummated an initial public offering. The   
Company sold 4,000,000 shares of common stock at a price to public of $10 per   
share for net proceeds of approximately $35.6 million. On August 12, 1997, the  
underwriters exercised their over-allotment option and purchased an additional  
450,000 shares at $10 per share which yielded net proceeds to the Company of    
approximately $4.2 million.                                                     

Stock Option Plan                                                             

The Company has a stock option plan (the Plan) pursuant to which the        
Company's Board of Directors may grant unqualified and performance-based        
options to employees. The Plan authorizes grants of option to purchase up to    
4,000,000 shares of authorized but unissued common stock. All stock options     
have a ten-year term and become fully exercisable on the date of grant or in    
increments over a three-year vesting period. The following table summarizes     
the stock option activity since the inception of the Plan through December 31,  
1996.                                                                           

                                                                [Download Table]

                                                                  WEIGHTED  
                                                                   AVERAGE  
                                       NUMBER OF  EXERCISE PRICE  REMAINING 
                                         SHARES      PER SHARE      TERM    
                                       ---------  -------------- -----------
                                                                            
Outstanding at January 1, 1996........       --         --                  
  Granted............................. 1,631,031      $1.31                 
  Canceled............................    (4,110)       --                  
  Exercised...........................       --         --                  
                                       ---------      -----                 
Outstanding at December 31, 1996...... 1,626,921      $1.31       9.2 years 
                                       =========      =====                 
Exercisable at December 31, 1996......   537,039      $1.31                 
                                       =========      =====                 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

The Company applies the intrinsic value method prescribed by APB Opinion No.
25 in accounting for its Plan and, accordingly, compensation costs of           
$1,032,646 and $256,785 have been recognized for its stock options for the year 
ended December 31, 1996 and for the nine-month period ended September 30, 1997, 
respectively. Had the Company determined compensation cost based on the fair    
value at the grant date for its stock options under SFAS No. 123, the Company's 
net loss and loss per share would have been:                                    

                                                                [Download Table]

                                                             DECEMBER 31, 1996  
                                                           ---------------------
                                                           AS REPORTED PRO FORMA
                                                           ----------- ---------
                                                                                
Net loss..................................................  $118,322    79,767  
                                                            ========    ======  
Loss per common equivalent share..........................  $   0.00      0.00  
                                                            ========    ======  

Under SFAS No. 123, the per-share minimum value of stock options granted in 
1996 was $0.61. The minimum value, estimated as of the grant date, does not     
take into account the expected volatility of the underlying stock as is         
prescribed by SFAS No. 123 for privately held companies. Input variables used   
in the model included an interest free rate of 6.43%, no expected dividend      
yields, and an estimated option life of 10 years. The pro forma impact on       
income assumes no options will be forfeited.                                    

Options granted during 1996 included performance based options. The         
compensation expense recorded for these performance based options under APB     
Opinion No. 25 was greater than the expense recorded if the Company had         
determined compensation cost under SFAS No. 123.                                

Warrants                                                                      

In connection with the Private Offering, the Company issued warrants to     
purchase 1,160,107 shares of the Company's common stock which, at the time of   
closing of the Private Offering, represented four percent of the Company's      
fully diluted common stock. The warrants are currently exercisable, carry an    
exercise price of $.002 per share, and expire November 27, 2003. As of December 
31, 1996, all of these warrants remain outstanding. If the Company has not      
consummated an initial public offering (IPO) prior to July 2, 1997, the holder  
of the warrants will receive additional shares equal to one-half of one percent 
of the outstanding shares on a fully diluted basis. If the Company has not      
consummated an IPO prior to January 2, 1998, the holder of the warrants will    
receive an additional amount equal to one-half of one percent of the            
outstanding shares on a fully diluted basis.                                    

The Company did not consummate its initial public offering prior to July 2, 
1997. Accordingly, the number of shares of common stock issuable upon exercise  
of the warrants will be increased by 153,644 shares, which represents one-half  
of one percent of the outstanding shares at July 2, 1997 on a fully diluted     
basis.                                                                          

(8) INCOME TAX MATTERS                                                          

Income tax expense (benefit) is comprised of the following:                 

                                                                [Download Table]

                                   DECEMBER 31,               SEPTEMBER 30,     
                           ------------------------------  -------------------- 
                             1994       1995       1996      1996       1997    
                           ---------  ---------  --------  --------- ---------- 
                                                                                
Current................... $(150,100) 3,526,900  (237,381)   780,748 (1,093,002)
Deferred..................  (198,200)  (937,200)  229,933    362,790   (273,052)
                           ---------  ---------  --------  --------- ---------- 
                           $(348,300) 2,589,700    (7,448) 1,143,538 (1,366,054)
                           =========  =========  ========  ========= ========== 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

Income tax expense differs from the amount computed by applying the federal 
income tax rate of 34% to earnings (loss) before taxes, as follows:             

                                                                [Download Table]

                                  DECEMBER 31,              SEPTEMBER 30,     
                           ----------------------------  -------------------- 
                             1994       1995     1996      1996       1997    
                           ---------  --------- -------  --------- ---------- 
                                                                              
Expected federal income                                                       
 tax (benefit)............ $(301,500) 2,180,000 (42,762) 1,085,651 (1,433,070)
State income tax (bene-                                                       
 fit), net of federal ef-                                                     
 fect.....................   (53,200)   384,700  (1,344)    35,002    (46,203)
Environmental tax.........       --      10,200     --         --         --  
Other nondeductible ex-                                                       
 penses, net..............     6,400     14,800  36,658     22,885    113,219 
                           ---------  --------- -------  --------- ---------- 
                           $(348,300) 2,589,700  (7,448) 1,143,538 (1,366,054)
                           =========  ========= =======  ========= ========== 

The tax effect of significant temporary differences giving rise to deferred 
income tax assets and liabilities are shown below:                              

                                                                [Download Table]

                                            DECEMBER 31,          SEPTEMBER 30,
                                    ----------------------------- -------------
                                      1994      1995      1996        1997     
                                    --------  --------- --------- -------------
                                                                               
Deferred income tax liabilities:                                               
  Property and equipment, princi-                                              
   pally depreciation adjustments.. $148,200    269,630   502,711     797,791  
  Capitalized software.............      --         --    669,160     657,680  
  Basis in subsidiaries............      --         --     32,898         --   
  Stock options exercised..........      --         --        --       89,490  
  Unearned foreign exchange differ-                                            
   ence............................      --         --        --        6,677  
  Cumulative adjustment, change in                                             
   accounting for income tax pur-                                              
   poses...........................  153,600        --        --          --   
                                    --------  --------- ---------   ---------  
    Total gross deferred tax                                                   
     liabilities................... $301,800    269,630 1,204,769   1,551,638  
                                    ========  ========= =========   =========  
Deferred income tax assets:                                                    
  Allowance for credit losses......  130,000    840,000 1,151,172   1,534,167  
  Accrued compensation.............   19,200    294,730   447,878     704,837  
  Net operating loss carryforward..   44,900        --        --          --   
  Charitable contribution                                                      
   carryforward....................   35,600        --    107,729     117,000  
  Unearned revenue.................      --         --     22,558      56,232  
  Basis in subsidiaries............      --         --        --      361,575  
  Unearned foreign exchange differ-                                            
   ence............................      --         --      4,543         --   
  Other............................      --         --    106,056     381,214  
                                    --------  --------- ---------   ---------  
    Total gross deferred tax as-                                               
     sets..........................  229,700  1,134,730 1,839,936   3,155,025  
    Less valuation allowance.......      --         --        --     (695,168) 
                                    --------  --------- ---------   ---------  
    Net deferred tax assets........  229,700  1,134,730 1,839,936   2,459,857  
                                    ========  ========= =========   =========  
    Net deferred tax asset (liabil-                                            
     ity).......................... $(72,100)   865,100   635,167     908,219  
                                    ========  ========= =========   =========  

(9) COMMITMENTS AND CONTINGENCIES                                               

Commitment with Telecommunications Company                                    

 The Company has an agreement with Sprint Communications Company L.P. (Sprint)
with net monthly usage commitments of $1,500,000. In the event such monthly     
commitments are not met, the Company is required                                

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

to remit to Sprint 25% of the difference between the $1,500,000 monthly         
commitment and actual usage. Such amount, if necessary, would be recorded as    
cost of revenue in the period incurred. The Company has exceeded the monthly    
usage commitments since the inception of this agreement. This agreement         
extends through December 1997.                                                  

Network                                                                       

At September 30, 1997, the Company had $4.5 million in commitments for      
capital expenditures. The Company has identified a total of $60.1 million of    
capital expenditures which the Company intends to undertake in 1997 and 1998    
and approximately $75.0 million of additional capital expenditures during the   
period from 1999 though 2001, subject to the ability to obtain additional       
financing.                                                                      

Retirement Plan                                                               

Effective January 1, 1996, the Company adopted the Telegroup, Inc. 401(k)   
Retirement Savings Plan (the Plan). The Plan is a defined contribution plan     
covering all employees of the Company who have one year of service and have     
attained the age of 21. Participants may contribute up to 15% of their base     
pay in pretax dollars. The Company will match employee contributions on a       
discretionary basis. Vesting in Company contributions is 100% after 5 years in  
the Plan. The Company made no contributions to the Plan in 1996.                

Litigation                                                                    

In September 1996, Macrophone Worldwide (PTY) Ltd. (the "Plaintiff"), a     
former Country Coordinator for South Africa, filed a complaint (the             
"Complaint") against the Company in the United States District Court for the    
Southern District of Iowa (the "Action") alleging, among other things, breach   
of contract, wrongful termination and intentional interference with             
contractual relations. The Complaint requests compensatory and exemplary        
damages. Although the Company is vigorously defending the Action, management    
believes that the Company will ultimately prevail and does not believe the      
outcome of the Action, if unfavorable, will have a material adverse effect on   
the Company's business, financial condition or results of operations, although  
there can be no assurance that this will be the case.                           

The Company is a party to certain other litigation which has arisen in the  
ordinary course of business. In the opinion of management, the ultimate         
resolution of these matters will not have a significant effect on the           
financial statements of the Company.                                            

(10) BUSINESS SEGMENT AND SIGNIFICANT CUSTOMER                                  

The Company operates in a single industry segment. For the years ended      
December 31, 1994, 1995 and 1996, substantially all of the Company's revenues   
were derived from traffic transmitted through switch facilities in New York     
and the United Kingdom. The geographic origin of revenue is as follows:         

                                                        [Enlarge/Download Table]

                                YEAR ENDED DECEMBER 31,        PERIOD ENDED SEPTEMBER 30, 
                         ------------------------------------- ---------------------------
                            1994         1995         1996         1996          1997     
                         ----------- ------------ ------------ ------------- -------------
                                                                                          
United States...........  29,490,585   35,154,246   60,360,882    44,080,498    81,521,394
Europe..................  12,306,408   41,173,425   81,137,404    57,157,577    74,741,219
Pacific Rim.............   8,485,055   22,613,550   42,185,403    24,911,285    58,357,738
Other...................  18,431,917   30,178,169   29,523,820    21,629,281    23,857,735
                         ----------- ------------ ------------ ------------- -------------
                         $68,713,965 $129,119,390 $213,207,509 $ 147,778,641  $238,478,086
                         =========== ============ ============ ============= =============

All revenue was derived from unaffiliated customers. For the nine-month     
period ended September 30, 1997 approximately 12% of the Company's total        
revenues were derived from a single customer.                                   

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FASTNET U.K. LIMITED

DIVISIONAL FINANCIAL STATEMENTS 

FOR THE PERIOD FROM 1 OCTOBER 1996 TO 28 FEBRUARY 1997

TABLE OF CONTENTS 

                                                                [Download Table]

                                                                            PAGE
                                                                            ----
                                                                                
Introduction...............................................................    2
Auditor's Report...........................................................    3
Divisional Balance Sheet as at 28 February 1997............................    4
Divisional Statement of Operations.........................................    5
Divisional Statement of Shareholder's Deficit..............................    6
Divisional Statement of Cash Flows.........................................    7
Notes to the Divisional Financial Statements............................... 8-10

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FASTNET U.K. LIMITED  

DIVISIONAL FINANCIAL STATEMENTS 

FOR THE PERIOD FROM 1 OCTOBER 1996 TO 28 FEBRUARY 1997  

INTRODUCTION  

The attached divisional financial statements have been extracted from the   
books and records of Fastnet U.K. Limited and represent that part of the        
company's activities that relate to its business with Telegroup Inc. under a    
marketing and co-ordination agreement dated 20 October 1996 (and as             
subsequently amended by mutual consent of both parties).                        

The divisional financial statements have been prepared in accordance with   
U.S. generally accepted accounting principles and are stated in U.S. dollars.   

The divisional balance sheet has been prepared from the books and records   
and includes the assets and liabilities of the division together with the       
earnings/(losses) from that division. For the purposes of the divisional        
balance sheet the financing of the division is shown as a liability to the      
other divisions of the company. The balance sheet is therefore an extract       
taken from the total company position, and does not include equity or other     
share capital.                                                                  

FD-2  

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AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF TELEGROUP, INC. 

ON THE DIVISIONAL FINANCIAL STATEMENTS OF FASTNET U.K. LIMITED  

FOR THE PERIOD FROM 1 OCTOBER 1996 TO 28 FEBRUARY 1997  

We have audited the divisional financial statements on pages 3 to 10 which  
have been prepared under the historical cost convention and the accounting      
policies set out on pages 7 to 8. These divisional financial statements have    
been extracted from the books and records of the company and represent that     
part of the company's activities that relate to its business undertaken as a    
co-ordinator on behalf of Telegroup, Inc. As detailed in an agreement dated 20  
October 1996 (and as subsequently amended by mutual consent of both parties)    
and as specified in Note 1(a) to the divisional financial statements.           

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS                           

The directors of Fastnet U.K. Limited are responsible for the preparation of
divisional financial statements. It is our responsibility to form an            
independent opinion, based on our audit, on those statements and to report our  
opinion to you.                                                                 

BASIS OF OPINION                                                                

We conducted our audit in accordance with U.K. Auditing Standards issued by 
the Auditing Practices Board. An audit includes examination, on a test basis,   
of evidence relevant to the amounts and disclosures in the divisional           
financial statements. It also includes an assessment of the significant         
estimates and judgements made by the directors in the preparation of the        
divisional financial statements, and of whether the accounting policies are     
appropriate to the company's circumstances, consistently applied and            
adequately disclosed.                                                           

We planned and performed our audit so as to obtain all the information and  
explanations which we considered necessary in order to provide us with          
sufficient evidence to give reasonable assurance that the divisional financial  
statements are free from material misstatement, whether caused by fraud or      
other irregularity or error. In forming our opinion we also evaluated the       
overall adequacy of the presentation of information in the divisional           
financial statements.                                                           

OPINION                                                                         

In our opinion the divisional financial statements give a true and fair view
of the state of the division's affairs as at 28 February 1997 and of its        
result and cash flow for the period then ended. These divisional financial      
statements have been properly prepared in accordance with generally accepted    
accounting principles.                                                          

                   MacIntyre & Co.
                         Chartered Accountants
                       Registered Auditors

28 Ely Place                                                                    
London                                                                          
EC1N 6RL                                                                        

FD-3  

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FASTNET U.K. LIMITED

DIVISIONAL BALANCE SHEET

AS AT 28 FEBRUARY 1997

                                                                [Download Table]

                                                                    28 FEBRUARY
                                                              NOTES    1997    
                                                              ----- -----------
                                                                         $     
                                                                               
ASSETS                                                                         
Current Assets                                                                 
  Accounts receivable and unbilled services..................          17,991  
  Prepaid expenses...........................................          15,333  
                                                                     --------  
    Total current assets.....................................          33,324  
Net property and equipment...................................    3     72,093  
                                                                     --------  
    TOTAL ASSETS.............................................        $105,417  
                                                                     ========  
LIABILITIES AND SHAREHOLDERS' EQUITY                                           
Current liabilities:                                                           
  Accounts payable...........................................           6,208  
  Accrued expenses...........................................           3,936  
  Amounts owed to other divisions of the company in respect                    
   of financing of trading activities........................    7    192,743  
  Amounts owed to directors..................................          11,807  
                                                                     --------  
    Total current liabilities................................         214,694  
Shareholders' deficit                                                          
  Common stock, no par or stated value                                         
  Retained losses............................................        (109,277) 
                                                                     --------  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................        $105,417  
                                                                     ========  

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FASTNET U.K. LIMITED

DIVISIONAL STATEMENT OF OPERATIONS

FOR THE PERIOD ENDED 28 FEBRUARY 1997 

                                                                [Download Table]

                                                       NOTES    $        $     
                                                       ----- ------- --------- 
                                                                               
Revenues:                                                                      
  Commissions receivable..............................  1(g)            36,560 
                                                                     --------- 
    Total revenues....................................                  36,560 
Operating Expenses                                                             
  Selling, general and administrative expenses........       117,258           
  Depreciation........................................        30,071           
                                                             -------           
  Total operating expenses............................  1(g)          (147,329)
                                                                     --------- 
Operating loss........................................                (110,769)
Other income:                                                                  
Foreign currency transaction gain.....................                   1,492 
                                                                     --------- 
Loss before income taxes..............................                (109,277)
Income tax expense....................................    5                --  
                                                                     --------- 
Net loss..............................................               $(109,277)
                                                                     ========= 

See accompanying notes to the divisional financial statements.

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FASTNET U.K. LIMITED

DIVISIONAL STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)

FOR THE PERIOD ENDED 28 FEBRUARY 1997 

                                                                [Download Table]

                                                                     TOTAL    
                             COMMON STOCK  ADDITIONAL  RETAINED   SHAREHOLDERS
                             -------------   PAID-IN   EARNINGS      EQUITY   
                             SHARES AMOUNT   CAPITAL   (DEFICIT)   (DEFICIT)  
                              NO.     $         $          $           $      
                             ------ ------ ----------- ---------  ------------
                                                                              
Issue of common stock.......  --     --        --           --           --   
Net loss....................  --     --        --      (109,277)    (109,277) 
                              ---    ---       ---     --------     --------  
Balances at 28 February                                                       
 1997.......................  --     --        --      (109,277)    (109,277) 
                              ---    ---       ---     --------     --------  

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FASTNET U.K. LIMITED

DIVISIONAL STATEMENT OF CASH FLOWS

FOR THE PERIOD ENDED 28 FEBRUARY 1997 

                                                                [Download Table]

                                                             $          $     
                                                                              
CASH FLOWS FROM OPERATING ACTIVITIES                                          
  Net loss............................................... (110,769)           
  Adjustments to reconcile net loss to net cash provided                      
   by operating activities...............................                     
  Depreciation...........................................   30,071            
Changes in operating assets and liabilities, excluding                        
 the effects of business combinations                                         
  Accounts receivable....................................  (17,991)           
  Prepaid expenses.......................................  (15,333)           
  Accounts payable and accrued expenses..................   10,144            
  Amounts owed to directors..............................   11,807            
                                                          --------            
NET CASH USED IN OPERATING ACTIVITIES....................             (92,071)
Cash flows from investing activities                                          
  Purchases of equipment.................................  102,164            
                                                          --------            
NET CASH USED IN INVESTING ACTIVITIES....................            (102,164)
                                                                    --------- 
                                                                     (194,235)
Effect of exchange rate changes on cash..................               1,492 
                                                                    --------- 
NET DECREASE IN CASH AND CASH EQUIVALENTS BEING AMOUNT                        
 OWED TO OTHER DIVISIONS OF THE COMPANY IN RESPECT OF                         
 FINANCING OF TRADING ACTIVITIES.........................           $(192,743)
                                                                    --------- 

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FASTNET U.K. LIMITED  

NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS  

FOR THE PERIOD ENDED 28 FEBRUARY 1997 

1. NATURE OF THE DIVISION AND SIGNIFICANT ACCOUNTING POLICIES                   

a) Nature of the division                                                     

The divisional financial statements have been extracted from the books and  
records of Fastnet U.K. Limited, and represent that part of the company's       
activities that relate to its business undertaken as a co-ordinator on behalf   
of Telegroup, Inc. In an agreement dated 20 October 1996, (and as subsequently  
amended by mutual consent as detailed of both parties).                         

Telegroup, Inc. is in the business of providing telecommunications services 
and under the agreement, Fastnet U.K. Limited has the right to market and       
distribute certain of Telegroup Inc.'s services in the United Kingdom.          

The divisional balance sheet has been prepared from the books and records   
and includes the assets and liabilities of the division together with the       
retained losses of that division. For the purposes of the divisional balance    
sheet these divisional financing of the division is shown as a liability to     
the other divisions of the company. The balance sheet is therefore on extract   
taken from the total company position, and does not include equity or other     
share capital.                                                                  

A summary of the division's significant accounting policies follows         

b) Basis of Presentation                                                      

The accompanying financial statements have been prepared in accordance with 
generally accepted accounting principles.                                       

c) Cash Equivalents                                                           

The division considers all highly liquid investments with original          
maturities of three months or less to be cash equivalents. There were no cash   
equivalents at 28 February 1997.                                                

d) Property and Equipment                                                     

Property and equipment are stated at cost less depreciation. Depreciation is
provided using the straight-line method over the useful lives of the assets as  
follows:                                                                        

                                                                [Download Table]
                                               
Computer equipment                      31 1/3%
Office fixtures, fitting and equipment      20%

All items of property and equipment purchased by the company as a whole     
since its incorporation relate entirely to this division and have been          
included in these divisional financial statements accordingly.                  

e) Income Taxes                                                               

The division accounts for U.K. taxes under the provisions of Statement of   
Standard Accounting Practice (SSAP). Numbers 8 and 15. Under the asset and      
liability method of SSAP 15, deferred tax assets and liabilities are            
recognised for the future tax consequences attributable to differences between  
the carrying amounts in the divisional financial statement of existing assets   
and liabilities and their respective tax bases. Deferred tax assets and         
liabilities are measured using enacted tax rates expected to apply to taxable   
income in the years in which those temporary differences are expected to be     
recovered or settled. Under SSAP 15, the effect on deferred tax assets and      
liabilities of a change in tax rates is recognised in income in the period      
that includes the enactment date.                                               

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FASTNET U.K. LIMITED  

NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED) 

FOR THE PERIOD ENDED 28 FEBRUARY 1997 

f) Estimates                                                                  

The preparation of divisional 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 at   
the date of the financial statements and the reported amounts of revenue        
during the reporting period. Actual amounts could differ from those estimates.  

g) Revenues and Expenses                                                      

Commissions receivable are recognised in the period that the associated     
telephone call revenues are recognised by Telegroup, Inc., and relate to the    
period from 290 October 1996 to 28 February 1997. Expenditure recognised in     
these financial statements relates to the period from 1 October 1996 to 28      
February 1997 in respect of all divisions of the company, as the operations of  
the other divisions of the company ceased prior to this date.                   

h) Foreign Currency Translation                                               

The functional currency of the division is the United States (U.S.) dollar. 
Assets and liabilities are translated at the closing rate in effect at the      
applicable reporting date, and the statement of operations is translated at     
the average exchange rates in effect during the applicable period.              

i) Fair Value of Financial Instruments                                        

The fairness of cash and cash equivalents, receivables, accounts payable and
lease obligations are estimated to approximate to carrying value due to the     
short-term maturities of these financial instruments.                           

2. RELATED PARTIES                                                              

At 28 February 1997, the division owed $11,807 to T.G. Redpath, Esq. a      
director of the company in respect of a rent deposit made on leasehold          
premises from which the company trades.                                         

3. PROPERTY AND EQUIPMENT                                                       

Property and equipment at 28 February 1997 is comprised of the following    

                                                                [Download Table]

                                                                  28 FEBRUARY
                                                                     1997    
                                                                  -----------
                                                                       $     
                                                                             
Furniture, fixtures and office equipment.........................    30,507  
Computer equipment...............................................    71,657  
                                                                    -------  
                                                                    102,164  
Less accumulated depreciation....................................   (30,071) 
                                                                    -------  
Net property and equipment.......................................   $72,093  
                                                                    =======  

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FASTNET U.K. LIMITED  

NOTES TO THE DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED) 

FOR THE PERIOD ENDED 28 FEBRUARY 1997 

4. LEASES                                                                       

The company leases office space under an operating lease and the future     
minimum lease payments under this agreement for each of the next five years is  
summarised below.                                                               

                                                                [Download Table]

                                                                    OPERATING
                                                                     LEASES  
                                                                    ---------
                                                                        $    
                                                                             
Period ending 28 February 1998.....................................   5,904  
                                                                      =====  

Rent expense under operating leases totalled $9,974 for the period ended 28 
February 1997.                                                                  

5. INCOME TAX MATTERS                                                           

As the division has made a tax allowable loss for U.K. corporation tax      
purposes, no provision for tax has been included within the divisional          
financial statements.                                                           

6. BUSINESS SEGMENT AND SIGNIFICANT CUSTOMER                                    

The division operates in a single industry segment. For the period ended 28 
February 1997, all of the division's revenues were derived from commissions     
earned under the marketing and co-ordination agreement with Telegroup, Inc.,    
in respect of activities undertaken in the United Kingdom.                      

7. AMOUNTS OWED TO OTHER DIVISIONS OF THE COMPANY IN RESPECT OF FINANCING OF    
TRADING ACTIVITIES                                                        

These divisional financial statements represent the activities of a division
of the company which operates under the marketing and co-ordination agreement   
with Telegroup, Inc. dated 20 October 1996, (and as subsequently amended by     
mutual consent between the parties). In order to finance these activities, the  
division has relied on funding by other divisions of the company and at 28      
February 1997 the extent of these borrowings was $192,743.                      

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FASTNET U.K. LIMITED

UNAUDITED DIVISIONAL FINANCIAL STATEMENTS 

FOR THE PERIOD FROM 1 MARCH 1997 TO 30 NOVEMBER 1997

TABLE OF CONTENTS 

                                                                [Download Table]

                                                                           PAGE 
                                                                           -----
                                                                                
Introduction.............................................................. FUD-2
Unaudited Divisional Balance Sheet as of 30 November 1997................. FUD-3
Unaudited Divisional Statement of Operations.............................. FUD-4
Unaudited Divisional Statement of Shareholders' Deficit................... FUD-5
Unaudited Divisional Statement of Cash Flows.............................. FUD-6
Notes to the Unaudited Divisional Financial Statements....................      

FUD-1 

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FASTNET U.K. LIMITED  

UNAUDITED DIVISIONAL FINANCIAL STATEMENTS 

FOR THE PERIOD FROM 1 MARCH 1997 TO 30 NOVEMBER 1997  

INTRODUCTION  

The attached divisional financial statements have been extracted from the   
books and records of Fastnet U.K. Limited, and represent that part of the       
company's activities that relate to its business with Telegroup Inc. under a    
marketing and co-ordination agreement dated 20 October 1996 (and as             
subsequently amended to mutual consent of both parties).                        

The divisional financial statements have been prepared in accordance with   
generally accepted accounting principles and are stated in U.S. dollars.        

The divisional balance sheet has been prepared from the books and records   
and includes the assets and liabilities of the division together with the       
earnings/(losses) from that division. For the purposes of the divisional        
balance sheet the financing of the division is shown as a liability to the      
other divisions of the company. The balance sheet is therefore an extract       
taken from the total company position, and does not include equity or other     
share capital.                                                                  

On 25 November 1997 the division sold its business as a going concern to    
Telegroup U.K. Limited as detailed in a sale agreement of the same date. This   
transaction has not been reflected in the divisional financial statements.      

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FASTNET U.K. LIMITED

UNAUDITED DIVISIONAL BALANCE SHEET

AS AT 30 NOVEMBER 1997

                                                                [Download Table]

                                                                    30 NOVEMBER
                                                                       1997    
                                                              NOTES      $     
                                                              ----- -----------
                                                                               
ASSETS                                                                         
Current Assets                                                                 
  Accounts receivable and unbilled services..................          61,329  
  Prepaid expenses...........................................             200  
                                                                     --------  
    Total current assets.....................................          61,529  
Net property and equipment...................................    3     82,337  
                                                                     --------  
    TOTAL ASSETS.............................................        $143,866  
                                                                     ========  
LIABILITIES AND SHAREHOLDERS' EQUITY                                           
Current liabilities:                                                           
  Accounts payable...........................................          11,612  
  Accrued expenses...........................................           4,082  
  Amounts owed to other divisions of the company in respect                    
   of financing of trading activities........................    6    267,831  
  Amounts owed to directors..................................          12,245  
                                                                     --------  
    Total current liabilities................................         295,770  
Shareholders' deficit Common stock, no par or stated value...             --   
  Retained losses............................................        (151,904) 
                                                                     --------  
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...............        $143,866  
                                                                     ========  

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FASTNET U.K. LIMITED

DIVISIONAL STATEMENT OF OPERATIONS

FOR THE PERIOD ENDED 30 NOVEMBER 1997 

                                                                [Download Table]

                                                         NOTES   $       $     
                                                         ----- ------ -------- 
                                                                               
Revenues:                                                                      
  Commissions receivable................................  1(g) 33,293          
  Consultancy fees receivable...........................  1(g) 72,179          
                                                               ------          
    Total revenues......................................               105,472 
Operating Expenses                                                             
  Selling, general and administrative expenses..........  1(g)        (143,025)
                                                                      -------- 
  Operating loss........................................               (37,553)
Other expense                                                                  
  Foreign currency transaction loss.....................                (5,074)
                                                                      -------- 
Net loss before income taxes............................              $(42,627)
                                                                      ======== 

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FASTNET U.K. LIMITED

UNAUDITED DIVISIONAL STATEMENT OF SHAREHOLDERS' DEFICIT 

FOR THE PERIOD ENDED 30 NOVEMBER 1997 

                                                                [Download Table]

                                                                     TOTAL    
                             COMMON STOCK  ADDITIONAL RETAINED   SHAREHOLDERS'
                             -------------  PAID-IN   EARNINGS      EQUITY    
                             SHARES AMOUNT  CAPITAL   (DEFICIT)    (DEFICIT)  
                              NO.     $        $          $            $      
                             ------ ------ ---------- ---------  -------------
                                                                              
Issue of common stock.......  --     --       --      (109,277)    (109,277)  
Issue of common stock.......  --     --       --           --           --    
Net loss....................  --     --       --       (42,627)     (42,627)  
                              ---    ---      ---     --------     --------   
Balances at 30 November                                                       
 1997.......................  --     --       --      (151,904)    (151,904)  
                              ===    ===      ===     ========     ========   

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FASTNET U.K. LIMITED

UNAUDITED DIVISIONAL STATEMENT OF CASH FLOWS

FOR THE PERIOD ENDED 30 NOVEMBER 1997 

                                                                [Download Table]

                                                               $         $     
                                                            -------  --------- 
                                                                               
CASH FLOWS FROM OPERATING ACTIVITIES                                           
  Net loss................................................  (37,553)           
Changes in operating assets and liabilities, excluding the                     
 effects of business combinations                                              
  Accounts receivable.....................................  (43,338)           
  Prepaid expenses........................................   15,133            
  Accounts payable and accrued expenses...................    5,550            
  Amounts owed to directors...............................      438            
                                                            -------            
  NET CASH USED IN OPERATING ACTIVITIES...................             (59,770)
Cash flows from investing activities:                                          
  Purchases of equipment..................................    7,570            
                                                            -------            
NET CASH USED IN INVESTING ACTIVITIES.....................              (7,570)
                                                                     --------- 
                                                                       (67,340)
Effect of exchange rate changes on cash...................              (7,748)
                                                                     --------- 
NET DECREASE IN CASH AND CASH EQUIVALENTS.................             (75,088)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..........            (192,743)
                                                                     --------- 
CASH AND CASH EQUIVALENTS AT END OF PERIOD BEING AMOUNT                        
 OWED TO OTHER DIVISIONS OF THE COMPANY IN RESPECT OF                          
 FINANCING OF TRADING ACTIVITIES..........................           $(267,831)
                                                                     ========= 

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FASTNET U.K. LIMITED  

NOTES TO THE UNAUDITED DIVISIONAL FINANCIAL STATEMENTS  

FOR THE PERIOD ENDED 30 NOVEMBER 1997 

(1) NATURE OF THE DIVISION AND SIGNIFICANT ACCOUNTING POLICIES                  

(a) Nature of the division                                                    

The divisional financial statements have been extracted from the books and  
records of Fastnet U.K. Limited, and represent that part of the company's       
activities that relate to its business undertaken as a co-ordinator on behalf   
of Telegroup, Inc. in an agreement dated 20 October 1996. (and as subsequently  
amended by mutual consent as detailed of both parties).                         

Telegroup, Inc. is in the business of providing telecommunications services 
and under the agreement, Fastnet U.K. Limited has the right to market and       
distribute certain of Telegroup, Inc.'s services in the United Kingdom.         

The divisional balance sheet has been prepared from the books and records   
and includes the assets and liabilities of the division together with the       
retained earnings from that division. For the purposes of the divisional        
balance sheet the financing of the division is shown as a liability to the      
other divisions of the company. The balance sheet is therefore an extract       
taken from the total company position, and does not include equity or other     
share capital.                                                                  

On 25 November 1997 the division sold its business as a going concern to    
Telegroup U.K. Limited as detailed in a sale agreement of the same date. This   
transaction has not been reflected in the divisional financial statements.      

A summary of the division's significant accounting policies follows:        

(b) Basis of Presentation                                                     

The accompanying financial statements have been prepared in accordance with 
generally accepted accounting principles.                                       

(c) Cash Equivalents                                                          

The division considers all highly liquid investments with original          
maturities of three months or less to be cash equivalents. There were no cash   
equivalents at 30 November 1997.                                                

(d) Property and Equipment                                                    

Property and equipment are stated at cost less depreciation. Depreciation is
provided using the straight-line method over the useful lives of the assets as  
follows:                                                                        

                                                                [Download Table]
                                                                          
Computer equipment................................................ 33 1/3%
Office fixtures, fittings and equipment...........................    20 %

All items of property and equipment purchased by the company as a whole     
since its incorporation relate entirely to this division and have been          
included in these divisional financial statements accordingly.                  

(e) Income Taxes                                                              

The division accounts for U.K. taxes under the provisions of Statement of   
Standard Accounting Practice (SSAP), Numbers 8 and 15. Under the asset and      
liability method of SSAP 15, deferred tax assets and liabilities                

FUD-7 

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FASTNET U.K. LIMITED  

NOTES TO THE UNAUDITED DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED) 

FOR THE PERIOD ENDED 30 NOVEMBER 1997 

are recognised for the future tax consequences attributable to differences      
between the carrying amounts in the divisional financial statements of          
existing assets and liabilities and their respective tax bases. Deferred tax    
assets and liabilities are measured using enacted tax rates expected to apply   
to taxable income in the years in which those temporary differences are         
expected to be recovered or settled. Under SSAP 15, the effect on deferred tax  
assets and liabilities of a change in tax rates is recognised in income in the  
period that includes the enactment date.                                        

(f) Estimates                                                                 

The preparation of divisional 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 at   
the date of the financial statements and the reported amounts of revenue        
during the reporting period. Actual amounts could differ from those estimates.  

(g)  Revenues and Expenses                                                    

Commissions receivable are recognised in the period when the associated     
telephone call revenues are recognised by Telegroup, Inc., and relate to the    
period from 1 March 1997 and 31 May 1997 Consultancy fees receivable are for    
the period from 1 June 1997 to 25 November 1997 as detailed in the amendments   
to the agreement with Telegroup, Inc. Expenditure is in respect of all          
divisions of the company, as the operations of the other divisions of the       
company ceased prior to this date.                                              

(h)  Foreign Currency Translation                                             

The functional currency of the division is the United States (U.S.) dollar. 
Assets and liabilities are translated at the closing rate in effect at the      
applicable reporting date, and the statement of operations is translated at     
the average exchange rates in effect during the applicable period.              

(i)  Fair Value of Financial Instruments                                      

The fair values of cash and cash equivalents, receivables, accounts payable 
and lease obligations are estimated to approximate to carrying value due to     
the short-term maturities of these financial instruments.                       

(2) RELATED PARTIES                                                             

At 30 November 1997 the division owed $12,245 to T.G. Redpath, Esq. a       
director of the company in respect of a rent deposit made on leasehold          
premises from which it trades.                                                  

(3) PROPERTY AND EQUIPMENT                                                      

Property and equipment at 24 November 1997 is comprised of the following:   

                                                                [Download Table]

                                                            NOVEMBER 24, 1997
                                                            -----------------
                                                                             
Furniture, fixtures and office equipment...................     $ 33,166     
Computer equipment.........................................       79,938     
                                                                --------     
                                                                 113,104     
Less accumulated depreciation..............................      (30,767)    
                                                                --------     
Net property and equipment.................................     $ 82,337     
                                                                ========     

FUD-8 

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FASTNET U.K. LIMITED  

NOTES TO THE UNAUDITED DIVISIONAL FINANCIAL STATEMENTS--(CONTINUED) 

FOR THE PERIOD ENDED 30 NOVEMBER 1997 

(4) INCOME TAX MATTERS                                                          

No provision for U.K. corporation tax has been made in these unaudited      
divisional financial statements.                                                

(5) BUSINESS SEGMENT AND SIGNIFICANT CUSTOMER                                   

The division operates a single industry segment. For the period ended 30    
November 1997, all of the division's operating revenues were derived from       
commissions and consultancy fees earned under the marketing and co-ordination   
agreement with Telegroup, Inc., in respect of activities undertaken in the      
United Kingdom.                                                                 

(6) AMOUNTS OWED TO OTHER DIVISIONS OF THE COMPANY IN RESPECT OF FINANCING OF   
TRADING ACTIVITIES                                                      

These unaudited divisional financial statements represent the activities of 
a division of the company which operates under the marketing and co-ordination  
agreement with Telegroup, Inc. dated 20 October 1996, (and as subsequently      
amended by mutual consent between the parties). In order to finance these       
activities, the division has relied on funding by other divisions of the        
company and at 30 November 1997 the extent of these borrowings was $267,831.    

FUD-9 

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PRO FORMA CONDENSED FINANCIAL STATEMENTS  

The following unaudited pro forma consolidated balance sheet and            
consolidated statements of operations are based on historical results of        
Telegroup, Inc and subsidiaries (the "Company") and Fastnet U.K. Limited        
("Fastnet") giving effect to the Company's acquisition of Fastnet's assets,     
accounted for as a purchase in accordance with generally accepted accounting    
principles. Pro forma adjustments, and the assumptions on which they are based  
are described in the accompanying footnotes to the pro forma consolidated       
financial statements. The accompanying pro forma consolidated balance sheet as  
of September 30, 1997 contains those pro forma adjustments necessary to         
reflect the Fastnet acquisition as if it was consummated on that date. The      
accompanying pro forma consolidated statements of operations for the year       
ended December 31, 1996 and the nine months ended September 30, 1997 contain    
those pro forma adjustments necessary to reflect the Fastnet acquisition as if  
it was consummated on January 1, 1996. Because these pro forma financial        
statements are prepared utilizing certain assumptions, the pro forma            
consolidated financial statements may not be indicative of actual financial     
position or results of operations as of the date and for the periods            
presented, respectively.                                                        

FP-1  

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TELEGROUP, INC. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                                           PRO FORMA ADJUSTMENTS GIVING EFFECT                    
                                                           FOR FASTNET U.K. LIMITED ACQUISITION                   
                          TELEGROUP, INC.   FASTNET U.K.                                                          
                          AND SUBSIDIARIES     LIMITED                                                            
                            (HISTORICAL)   (HISTORICAL)(A)       DEBIT                CREDIT           PRO FORMA  
                          ---------------- --------------- ------------------    ------------------   ----------- 
                                                                                                                  
Revenues:                                                                                                         
  Retail................    $179,146,795        36,560                 36,560(d)               --     179,146,795 
  Wholesale.............      34,060,714           --                     --                   --      34,060,714 
                            ------------      --------     ------------------    -----------------    ----------- 
    Total revenues......     213,207,509        36,560                 36,560                  --     213,207,509 
Cost of revenues........     150,536,859           --                     --                   --     150,536,859 
                            ------------      --------     ------------------    -----------------    ----------- 
  Gross profit..........      62,670,650        36,560                 36,560                  --      62,670,650 
                            ------------      --------     ------------------    -----------------    ----------- 
Operating expenses:                                                                                               
  Selling, general and                                                                                            
   administrative                                                                                                 
   expenses.............      59,651,857       117,258                    --                36,560(d)  59,732,555 
  Depreciation and                                                                                                
   amortization.........       1,881,619        30,071                 13,164(e)               --       1,924,854 
  Stock option based                                                                                              
   compensation.........       1,032,646           --                     --                   --       1,032,646 
                            ------------      --------     ------------------    -----------------    ----------- 
    Total operating                                                                                               
     expenses...........      62,566,122       147,329                 13,164               36,560     62,690,055 
                            ------------      --------     ------------------    -----------------    ----------- 
    Operating income                                                                                              
     (loss).............         104,528      (110,769)               (49,724)              36,560        (19,405)
Other income (expense):                                                                                           
  Interest expense......        (578,500)          --                     --                   --        (578,500)
  Interest income.......         377,450           --                     --                   --         377,450 
  Foreign currency                                                                                                
   transaction gain                                                                                               
   (loss)...............        (147,752)        1,492                    --                   --        (146,260)
  Other.................         118,504           --                     --                   --         118,504 
                            ------------      --------     ------------------    -----------------    ----------- 
Earnings (loss) before                                                                                            
 income taxes and                                                                                                 
 extraordinary item.....        (125,770)     (109,277)               (49,724)              36,560       (248,211)
Income tax benefit......           7,448           --                  44,079(f)               --          51,527 
Minority interest in                                                                                              
 shares of earnings                                                                                               
 (loss).................             --            --                     --                   --             --  
                            ------------      --------     ------------------    -----------------    ----------- 
Earnings (loss) before                                                                                            
 extraordinary item.....        (118,322)     (109,277)                (5,645)              36,560       (196,684)
Extraordinary item, loss                                                                                          
 on extinguishment of                                                                                             
 debt, net of income                                                                                              
 taxes..................             --            --                     --                   --             --  
                            ------------      --------     ------------------    -----------------    ----------- 
    Net earnings                                                                                                  
     (loss).............    $   (118,322)     (109,277)                (5,645)              36,560       (196,684)
                            ============      ========     ==================    =================    =========== 
Per share amounts (g):                                                                                            
  Earnings (loss) before                                                                                          
   extraordinary item...         ($0.00)                                                                   ($0.01)
                            ============                                                              =========== 
  Net earnings (loss)...         ($0.00)                                                                   ($0.01)
                            ============                                                              =========== 
Weighted-average                                                                                                  
 shares.................      28,784,635                                                               28,784,635 
                            ============                                                              =========== 

See accompanying notes to unaudited pro forma financial statements. 

FP-2

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TELEGROUP, INC. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

NINE-MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED) 

                                                        [Enlarge/Download Table]

                                                             PRO FORMA                      
                                                            ADJUSTMENTS                     
                                                           GIVING EFFECT                    
                                                            FOR FASLNET                     
                          TELEGROUP, INC.   FASLNET U.K.    U.K. LIMITED                    
                          AND SUBSIDIARIES     LIMITED      ACQUISITION                     
                            (HISTORICAL)   (HISTORICAL)(B)  DEBIT     CREDIT     PRO FORMA  
                          ---------------- --------------- -------    ------    ----------- 
                                                                                            
Revenues:                                                                                   
  Retail................   $ 169,720,131       105,472      33,293(d)    --     169,792,310 
  Wholesale.............      68,757,955           --          --        --      68,757,955 
                           -------------       -------     -------    ------    ----------- 
    Total revenues......     238,478,086       105,472      33,293       --     238,550,265 
Cost of revenues........     174,273,208           --          --        --     174,273,208 
                           -------------       -------     -------    ------    ----------- 
  Gross profit..........      64,204,878       105,472      33,293       --      64,277,057 
                           -------------       -------     -------    ------    ----------- 
Operating expenses:                                                                         
  Selling, general and                                                                      
   administrative                                                                           
   expenses.............      63,174,487       143,025         --     33,293(d)  63,284,219 
  Depreciation and amor-                                                                    
   tization.............       3,208,063           --        9,873(e)    --       3,217,936 
  Stock option based                                                                        
   compensation.........         256,785           --          --        --         256,785 
                           -------------       -------     -------    ------    ----------- 
    Total operating ex-                                                                     
     penses.............      66,639,335       143,025       9,873    33,293     66,758,940 
                           -------------       -------     -------    ------    ----------- 
    Operating income                                                                        
     (loss).............      (2,434,457)      (37,553)    (43,166)   33,293     (2,481,883)
Other income (expense):                                                                     
  Interest expense......      (2,134,691)          --          --        --      (2,134,691)
  Interest income.......         782,299           --          --        --         782,299 
  Foreign currency                                                                          
   transaction gain                                                                         
   (loss)...............       (587,291)        (5,074)        --        --        (592,365)
  Other.................         159,228           --          --        --         159,228 
                           -------------       -------     -------    ------    ----------- 
Earnings (loss) before                                                                      
 income taxes and                                                                           
 extraordinary item.....      (4,214,912)      (42,627)    (43,166)   33,293     (4,267,412)
Income tax benefit......       1,366,054           --       18,900(f)    --       1,384,954 
Minority interest in                                                                        
 shares of earnings                                                                         
 (loss).................             --            --          --        --             --  
                           -------------       -------     -------    ------    ----------- 
Earnings (loss) before                                                                      
 extraordinary item.....      (2,848,858)      (42,627)    (24,266)   33,293     (2,882,458)
Extraordinary item, loss                                                                    
 on extinguishment of                                                                       
 debt, net of income                                                                        
 taxes..................      (9,970,815)          --          --        --      (9,970,815)
                           -------------       -------     -------    ------    ----------- 
    Net earnings                                                                            
     (loss).............   $ (12,819,673)      (42,627)    (24,266)   33,293    (12,853,273)
                           =============       =======     =======    ======    =========== 
Per share amounts(g):                                                                       
  Earnings (loss) before                                                                    
   extraordinary item...          ($0.10)                                            ($0.10)
                           =============                                        =========== 
  Net earnings (loss)...          ($0.47)                                            ($0.47)
                           =============                                        =========== 
Weighted-average                                                                            
 shares.................      27,462,331                                         27,462,331 
                           =============                                        =========== 

See accompanying notes to unaudited pro forma financial statements. 

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TELEGROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 1997 (UNAUDITED)

                                                        [Enlarge/Download Table]

                                                                  PRO FORMA                          
                                                             ADJUSTMENTS GIVING                      
                         TELEGROUP, INC.   FASTNET U.K.      EFFECT FOR FASTNET                      
                         AND SUBSIDIARIES     LIMITED     U.K. LIMITED ACQUISITION                   
                           (HISTORICAL)   (HISTORICAL)(B)    DEBIT           CREDIT        PRO FORMA 
                         ---------------- --------------- ------------    ------------    -----------
                                                                                                     
         ASSETS                                                                                      
Current Assets:                                                                                      
  Cash and cash equiva-                                                                              
   lents................   $ 58,215,248           --               --          238,503(c)  57,976,745
  Accounts receivable                                                                                
   and unbilled                                                                                      
   services, less                                                                                    
   allowance for credit                                                                              
   losses...............     48,007,389        61,329              --           61,329(c)  48,007,389
  Income tax recover-                                                                                
   able.................      2,924,478           --               --              --       2,924,478
  Deferred taxes........      1,639,066           --               --              --       1,639,066
  Prepaid expenses and                                                                               
   other assets.........        757,508           200              --              200(c)     757,508
  Receivables from                                                                                   
   shareholders.........         45,880           --               --              --          45,880
  Receivables from em-                                                                               
   ployees..............        189,070           --               --              --         189,070
                           ------------      --------     ------------    ------------    -----------
    Total current                                                                                    
     assets.............    111,778,639        61,529              --          300,032    111,540,136
                           ------------      --------     ------------    ------------    -----------
Net property and                                                                                     
 equipment..............     21,596,980        82,337              --           41,298(c)  21,638,019
                           ------------      --------     ------------    ------------    -----------
Other assets:                                                                                        
  Deposits and other as-                                                                             
   sets.................        688,665           --               --              --         688,665
  Goodwill, net of amor-                                                                             
   tization.............      2,969,347           --           197,464(c)          --       3,166,811
  Capitalized software,                                                                              
   net of amortization..      1,873,946           --               --              --       1,873,946
  Debt issuance costs,                                                                               
   net of amortization..        750,000           --               --              --         750,000
                           ------------      --------     ------------    ------------    -----------
                              6,281,958           --           197,464             --       6,479,422
                           ------------      --------     ------------    ------------    -----------
    Total assets........   $139,657,577       143,866          197,464         341,330    139,657,577
                           ============      ========     ============    ============    ===========
    LIABILITIES AND                                                                                  
  SHAREHOLDERS' EQUITY                                                                               
Current liabilities:                                                                                 
  Accounts payable......     44,413,669       291,688          291,688(c)          --      44,413,669
  Accrued expense.......     12,233,538         4,082            4,082(c)          --      12,233,538
  Unearned revenue......        160,222           --               --              --         160,222
  Note payable..........     15,000,000           --               --              --      15,000,000
  Customer deposits.....        717,224           --               --              --         717,224
  Current portion of                                                                                 
   long-term debt.......         92,194           --               --              --          92,194
  Current portion of                                                                                 
   capital lease                                                                                     
   obligations..........        127,099           --               --              --         127,099
                           ------------      --------     ------------    ------------    -----------
    Total current                                                                                    
     liabilities........     72,743,946       295,770          295,770             --      72,743,946
Deferred taxes..........        730,847           --               --              --         730,847
Capital lease                                                                                        
 obligations............        218,320           --               --              --         218,320
Long-term debt..........     25,042,057           --               --              --      25,042,057
Minority interest.......            --            --               --              --             -- 
Shareholders' equity....     40,922,407      (151,904)             --          151,904(c)  40,922,407
                           ------------      --------     ------------    ------------    -----------
    Total liabilities                                                                                
     and shareholders'                                                                               
     equity.............   $139,657,577       143,866          295,770         151,904    139,657,577
                           ============      ========     ============    ============    ===========

See accompanying notes to unaudited pro forma financial statements. 

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NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 

The unaudited pro forma consolidated balance sheet reflects the historical  
financial position at September 30, 1997, with pro forma adjustments as if the  
Fastnet acquisition had taken place on September 30, 1997. The unaudited pro    
forma consolidated statements of operations for the year ended December 31,     
1996 and the nine months ended September 30, 1997 reflect the historical        
results of operations with pro forma adjustments based on the assumption the    
Fastnet acquisition was effective as of January 1, 1996. The following          
adjustments give pro forma effect to the Fastnet acquisition (in addition to    
certain reclassifications to conform presentations):                            

(a) The historical financial statements of Fastnet are presented using  
Fastnet's fiscal period, which is February 28, 1997.                

(b) The historical financial statements of Fastnet are presented as of  
and for the nine months ended November 30, 1997.                    

(c) The acquisition of Fastnet will be accounted for as a purchase. The 
Company gave $238,503 in cash in consideration for certain Fastnet  
assets. The Company recorded the estimated fair value of Fastnet's  
assets on the date of purchase.                                     

                                                                [Download Table]
                                                                         
Cost of acquisition............................................ $238,503 
Estimated fair value of assets acquired........................  (41,039)
                                                                -------- 
  Excess of cost over estimated fair value..................... $197,464 
                                                                ======== 

(d) The elimination in consolidation of commissions paid by the Company 
to Fastnet.                                                         

(e) The amortization of goodwill created from the acquisition of        
Fastnet over the estimated useful life of 15 years.                 

(f) The tax effect of the pro forma adjustments using a 36 percent tax  
rate.                                                               

(g) For the year ended December 31, 1996, earnings (loss) per share has 
been computed using the weighted-average number of shares of common 
stock outstanding as adjusted for the effects of the Securities and 
Exchange Commission Staff Accounting Bulletin No. 83. Accordingly,  
 options and warrants to purchase common stock granted within one year
of the Company's initial public offering, which have exercise prices
below the assumed initial public offering price per share, have been
included in the calculation of common equivalent shares, using the  
treasury stock method, as if they were outstanding for the entire   
year. For the nine month period ended September 30, 1997, earnings  
 (loss) per share has been computed under the provisions of Accounting
Principles Board Opinion No. 15, Earnings Per Share.                

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

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY  
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS   
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, 
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-  
THORIZED BY THE COMPANY, ANY SELLING SHAREHOLDERS, OR BY ANY OF THE UNDERWRIT-  
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN  
THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO 
BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT     
LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS DOES   
NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO   
ITS DATE.                                                                       

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

TABLE OF CONTENTS 

                                                                [Download Table]

                                                                         PAGE 
                                                                         -----
                                                                              
Available Information...................................................     2
Disclosure Regarding Forward-Looking Statements.........................     2
Prospectus Summary......................................................     3
Recent Developments.....................................................     6
The Offering............................................................     7
Summary Financial Data..................................................     8
Risk Factors............................................................    10
Use of Proceeds.........................................................    30
Dividend Policy.........................................................    30
Market for the Common Equity and Related Stockholder Matters............    30
Capitalization..........................................................    31
Selected Financial Data.................................................    32
Management's Discussion and Analysis of Financial Condition and Results       
  of Operations.........................................................    34
The Global Telecommunications Industry..................................    45
Business................................................................    53
Management..............................................................    79
Certain Transactions....................................................    87
Principal Shareholders..................................................    88
Selling Shareholders....................................................    89
Description of the Capital Stock........................................    90
Description of Convertible Subordinated Notes...........................    94
Description of Other Indebtedness.......................................    96
Plan of Distribution....................................................   119
Transfer Agent and Registrar............................................   119
Shares Eligible for Future Sale.........................................   120
Certain United States Federal Income Tax Considerations for Non-U.S.          
  Holders of Common Stock...............................................   121
Legal Matters...........................................................   123
Experts.................................................................   123
Glossary of Terms.......................................................   124
Index to Consolidated Financial Statements..............................   F-1
Index to Fastnet Financial Statements...................................  FD-1
Index to Fastnet Unaudited Financial Statements......................... FUD-1
Pro Forma Condensed Financial Statements................................  FP-1

--------------------------------------------------------------------------------
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PART II 

INFORMATION NOT REQUIRED IN PROSPECTUS  

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.                           

The table below sets forth the expenses to be incurred by the Company in    
connection with the issuance and distribution of the shares registered for      
offer and sale hereby. All amounts shown represent estimates except the         
Securities Act registration fee.                                                

                                                                [Download Table]
                                                                            
Registration fee under the Securities Act of 1933...................... $   
Printing and EDGAR expenses............................................     
Registrar and Transfer Agent's fees and expenses.......................     
Accountants' fees and expenses.........................................     
Legal fees and expenses................................................     
Blue Sky fees and expenses.............................................     
Miscellaneous..........................................................     
                                                                        ----
  Total................................................................ $   
                                                                        ====

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.                             

The Iowa Business Corporation Act confers broad powers upon corporations    
incorporated in Iowa with respect to indemnification of any person against      
liabilities incurred by reason of the fact that such person is or was a         
director, officer, employee or agent of the corporation, or is or was serving   
at the request of the corporation as a director, officer, employee or agent of  
another Corporation or other business entity. These provisions are not          
exclusive of any other rights to which those seeking indemnification may be     
entitled under any bylaw, agreement or otherwise.                               

The Company's Second Restated Articles of Incorporation contain a provision 
that eliminates the personal liability of the Company's directors to the        
Company or its shareholders for monetary damages for breach of fiduciary duty   
as a director, except (i) for liability for any breach of the director's duty   
of loyalty to the Corporation or its shareholders, (ii) for acts or omissions   
not in good faith or which involve intentional misconduct or knowing violation  
of the law, (iii) for any transaction from which the director derived an        
improper personal benefit, or (iv) for unlawful distributions in violation of   
Section 490.833 of the Iowa Business Corporation Act. Any repeal or amendment   
of this provision by the shareholders of the Corporation will not adversely     
affect any right or protection of a director existing at the time of such       
repeal or amendment.                                                            

The Company's Amended and Restated Bylaws contain a provision entitling     
officers and directors to be indemnified and held harmless by the Company       
against expenses, liabilities and costs (including attorneys' fees) actually    
and reasonably incurred by such person, to the fullest extent permitted by the  
Iowa Business Corporation Act.                                                  

The Company has obtained a director and officer liability policy, under     
which each director and certain officers of the Company would be insured        
against certain liabilities.                                                    

The Company entered into indemnification agreements with certain of its     
executive officers and directors (collectively, the "Indemnification            
Agreements"). Pursuant to the terms of the Indemnification Agreements, each of  
the executive officers and directors who are parties thereto will be            
indemnified by the Company to the full extent provided by law in the event      
such officer or director is made or threatened to be made a party to a claim    
arising out of such person acting in his capacity as an officer or director of  
the Company. The Company has further agreed that, upon a change in control, as  
defined in the Indemnification Agreements, the rights of such officers and      
directors to indemnification payments and expense advances will be determined   
in accordance with the provisions of the Iowa Business Corporation Act and has  
also agreed that, upon a potential change of control, as defined in the         
Indemnification Agreements, it will create a trust in an amount sufficient to   
satisfy all indemnity                                                           

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expenses reasonably anticipated at the time a written request to create such a  
trust is submitted by an officer or director. Insofar as indemnification for    
liabilities arising under the Securities Act may be permitted to directors,     
officers and controlling persons of the Registrant pursuant to the foregoing    
provisions, or otherwise, the Registrant has been advised that in the opinion   
of the Commission such indemnification is against public policy as expressed    
in the Securities Act and is, therefore, unenforceable. In the event that a     
claim for indemnification against such liabilities (other than the payment by   
the Registrant of expenses incurred or paid by a director, officer or           
controlling person of the Registrant in the successful defense of any action,   
suit or proceeding) is asserted by such director, officer or controlling        
person in connection with the securities being registered, the Registrant       
will, unless in the opinion of its counsel the matter has been settled by       
controlling precedent, submit to a court of appropriate jurisdiction the        
question whether such indemnification by it is against public policy as         
expressed in the Securities Act and will be governed by the final adjudication  
of such issue.                                                                  

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.                               

The following paragraphs of this Item 15 describe all offers and sales of   
securities by the Company within the last three years which were not            
registered under the Securities Act of 1933, other than securities issued in    
connection with stock reclassifications, stock dividends or stock splits:       

On April 23, 1996, the Company issued 518,988 shares of Common Stock to     
Michael Lackman for the aggregate consideration of $20,946.53 paid by Mr.       
Lackman with a promissory note in the principal amount of $20,946.53.           

On April 26, 1996, the Company issued 778,485 shares of Common Stock to     
Ronald Stakland for the aggregate consideration of $31,419.80 paid by Mr.       
Stakland with a promissory note in the principal amount of $31,419.80.          

On August 21, 1996, in connection with the Plan and Agreement of            
Reorganization between the Company, George Apple and Telegroup South Europe,    
Inc. ("TGSE"), the Company issued 262,116 shares of Common Stock and made a     
cash payment to George Apple in exchange for substantially all of the assets    
of TGSE.                                                                        

Amended and Restated 1996 Telegroup, Inc. Stock Option Plan. See            
"Management--Amended and Restated 1996 Telegroup, Inc. Stock Option Plan"       
incorporated by reference herein from the Prospectus included in Part I of      
this Registration Statement.                                                    

November 27, 1996 Issuance of Senior Subordinated Notes and Warrants. On    
November 27, 1996, the Company completed a $20 million private placement of     
its 12.0% Senior Subordinated Notes, together with warrants to purchase 4.0%    
of the Company's fully-diluted Common Stock. See "Certain Transactions--        
Subordinated Note Placement" and "Description of Capital Stock--Warrants."      

Each issuance of securities described above was made in reliance on the     
exemption from registration provided by Section 4(2) of the Securities Act as   
a transaction by an issuer not involving any public offering. The recipients    
of securities in each such transaction represented their intention to acquire   
the securities for investment only and not with a view to or for sale in        
connection with any distribution thereof and appropriate legends were affixed   
to the share certificates issued in such transactions. All recipients had       
adequate access, through their relationships with the Company, to information   
about the Company.                                                              

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ITEM 16(A). EXHIBITS.                                                           

                                                                [Download Table]

EXHIBIT                                                          SEQUENTIALLY 
NUMBER                        DESCRIPTION                        NUMBERED PAGE
-------                       -----------                        -------------
                                                                              
    1.1 Purchase Agreement Between the Company and Smith                      
         Barney Inc. Dated September 30, 1997                                 
    1.2 Purchase Agreement Between the Company, Smith Barney                  
         Inc. and BT Alex. Brown Incorporated Dated October                   
         20, 1997 (Incorporated by reference as Exhibit 1.1 to                
         the Company's Form S-4 Registration Statement filed                  
         on December 19, 1997)                                                
   *2.1 Plan and Agreement of Reorganization Between the                      
         Company, George Apple and Telegroup South Europe,                    
         Inc. Dated September 6, 1996                                         
   *2.2 Plan and Agreement of acquisition between the Company,                
         Telecontinent, S.A. and Georges Apple dated September                
         6, 1996                                                              
    2.3 Agreement Between Fastnet UK Limited, Telegroup UK                    
         Limited, Giles Redpath and Telegroup, Inc.                           
         (Incorporated by reference as Exhibit 10 to the                      
         Company's Form 8-K filed on December 9, 1997, SEC                    
         File No. 0-29284)                                                    
   *3.1 Restated Articles of Incorporation of Telegroup, Inc.                 
   *3.2 Form of Second Restated Articles of Incorporation of                  
         Telegroup, Inc.                                                      
   *3.3 Bylaws of Telegroup, Inc.                                             
   *3.4 Form of Amended and Restated Bylaws of Telegroup, Inc.                
   *4.1 Form of Common Stock Certificate of Telegroup, Inc.                   
   *4.2 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4                   
   *4.3 Note and Warrant Purchase Agreement dated as of                       
         November 27, 1996                                                    
   *4.4 Form of Warrant to Purchase Class A Common Stock of                   
         Telegroup, Inc.                                                      
   *4.5 Indenture dated as of November 27, 1996 between                       
         Telegroup, Inc. and The Chase Manhattan Bank                         
    4.6 Indenture for 8.0% Convertible Notes dated September                  
         30, 1997 (Incorporated by reference as Exhibit 4.1to                 
         the Company's Form 10-Q for the quarter-ended                        
         September 30, 1997, SEC File No. 0-29284)                            
    4.7 Indenture for 10.5% Senior Discount Notes dated                       
         October 23, 1997 (Incorporated by reference as                       
         Exhibit 4.2 to the Company's Form 10-Q for the                       
         quarter-ended September 30, 1997, SEC File No. 0-                    
         29284)                                                               
  ++5.1 Opinion of Swidler & Berlin, Chartered regarding                      
         legality                                                             
  *10.1 Loan Agreement Dated as of March 28, 1997 by and                      
         between the Company and American National Bank and                   
         Trust Company of Chicago                                             
*10.1.1 First Amendment to Loan Agreement between the Company                 
         and American National Bank and Trust Company of                      
         Chicago dated as of June 6, 1997.                                    
  *10.2 Amended and Restated 1996 Telegroup, Inc. Stock Option                
         Plan                                                                 
  *10.3 Form of Employment Agreement between the Company and                  
         Fred Gratzon                                                         
  *10.4 Form of Employment Agreement between the Company and                  
         Clifford Rees                                                        
  *10.5 Form of Indemnification Agreement                                     
  *10.6 Registration Rights Agreement among Telegroup, Inc.,                  
         Greenwich Street Capital Partners, L.P., Greenwich                   
         Street Capital Offshore Fund, Ltd., TRV Employees                    
         Fund, L.P., The Travelers Insurance Company and The                  
         Travelers Life and Annuity Company Dated as of                       
         November 27, 1996                                                    
  *10.7 Form of Registration Rights Agreement between the                     
         Company and certain Shareholders of the Company                      

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                                                                [Download Table]

EXHIBIT                                                          SEQUENTIALLY 
NUMBER                        DESCRIPTION                        NUMBERED PAGE
-------                       -----------                        -------------
                                                                              
*+10.8  Agreement between Telegroup, Inc. and New T & T Hong                  
         Kong Limited                                                         
*+10.9  Resale Solutions Switched Services Agreement between                  
         Sprint Communications                                                
         Company L.P. and Telegroup, Inc.                                     
 *10.10 Form of Employment Agreement between the Company and                  
         John P. Lass                                                         
 *10.11 Form of Employment Agreement between the Company and                  
         Ron Jackenthal                                                       
 *10.12 Form of Employment Agreement between the Company and                  
         Certain Executive Officers                                           
  10.13 Notes Registration Rights Agreement between the                       
         Company and Smith Barney Inc.,                                       
         and Alex Brown Incorporated Dated as of October 23,                  
         1997 (Incorporated by reference as Exhibit 10.13 to                  
         the Company's Form S-4 Registration Statement filed                  
         on December 19, 1997                                                 
  10.14 Registration Rights Agreement between the Company and                 
         Smith Barney Inc. Dated                                              
         as of September 30, 1997                                             
 *21.1  Subsidiaries of Telegroup, Inc.                                       
  23.1  Consent of KPMG Peat Marwick, LLP                                     
  23.2  Consent of MacIntyre & Co.                                            
  23.3  Consent of Swidler & Berlin, Chartered (to be included                
         in Exhibit 5.1 to this Registration Statement)                       
 *24.1  Power of Attorney                                                     
  27.1  Financial Data Schedule                                               

--------                                                                        
*  Previously filed as Exhibits to Form S-1, SEC Registration Statement File    
No. 333-25065.                                                            
+  Confidential Treatment has been requested for portions of this document.     
The redacted material has been filed separately with the Commission.      
++ To be filed by amendment.                                                    

ITEM 16(B). FINANCIAL STATEMENT SCHEDULES.                                      

II--Valuation and Qualifying Accounts (previously filed)                    

All other schedules are omitted either because they are not applicable or   
are not material, or the information presented therein is contained in the      
Financial Statements or notes thereto.                                          

ITEM 17. UNDERTAKINGS.                                                          

The undersigned Registrant hereby undertakes that:                          

(1) For purposes of determining any liability under the Securities Act, the 
information omitted from the form of prospectus filed as part of this           
Registration Statement in reliance upon Rule 430A and contained in a form of    
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)  
under the Securities Act shall be deemed to be part of this Registration        
Statement as of the time it was declared effective.                             

(2) For the purpose of determining any liability under the Securities Act,  
each post-effective amendment that contains a form of prospectus shall be       
deemed to be a new Registration Statement relating to the securities offered    
therein, and the offering of such securities at that time shall be deemed to    
be the initial bona fide offering thereof.                                      

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SIGNATURES  

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT  
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE   
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF FAIRFIELD, STATE OF      
IOWA, ON DECEMBER 22, 1997.                                                     

                   Telegroup, Inc.

                        By:                *
                                             -----------------------------------
                                            CLIFFORD REES, PRESIDENT AND
                                           CHIEF EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS            
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE          
CAPACITIES INDICATED ON DECEMBER 22, 1997.                                      

SIGNATURE                                TITLE      
---------                                -----      

           *                    Chairman of the Board and Director
-------------------------------------                                           
FRED GRATZON                                            

           *                    Chief Executive Officer, President
-------------------------------------   and Director (Principal Executive       
CLIFFORD REES               Officer)                    

       *                    Vice President--Finance, Chief
-------------------------------------   Financial Officer, Treasurer and        
DOUGLAS A. NEISH              Director (Principal Financial 
        Officer)

           *                    Director of Finance and Controller
-------------------------------------   (Principal Accounting Officer)          
GARY KORF                                           

                                  Senior Vice President, International
-------------------------------------   Services and Director                   
RONALD B. STAKLAND                                            

/s/ Charles Johanson           Attorney-in-Fact                 
-------------------------------------                                           
CHARLES JOHANSON                                            
* Charles Johanson, by signing his name hereto, signs this document on behalf   
of each of the persons so indicated above pursuant to powers of attorney duly   
executed by such persons and filed with the Securities and Exchange             
Commission.                                                                     

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EXHIBIT INDEX 

                                                                [Download Table]
                                                                             
   1.1   Purchase Agreement Between the Company and Smith Barney Inc. Dated  
          September 30, 1997.                                                

   1.2   Purchase Agreement Between the Company, Smith Barney Inc. and BT    
          Alex. Brown Incorporated Dated October 20, 1997 (Incorporated by   
          reference as Exhibit 1.1 to the Company's Form S-4 Registration    
          Statement filed on December 22, 1997)                              

  *2.1   Plan and Agreement of Reorganization Between the Company, George    
          Apple and Telegroup South Europe, Inc. Dated September 6, 1996     

  *2.2   Plan and Agreement of acquisition between the Company,              
          Telecontinent, S.A. and Georges Apple dated September 6, 1996.     

   2.3   Agreement Between Fastnet UK Limited, Telegroup UK Limited, Giles   
          Redpath and Telegroup, Inc. (Incorporated by reference as Exhibit  
          10 to the Company's Form 8-K filed on December 9, 1997, SEC File   
          No. 0-29284)                                                       

  *3.1   Restated Articles of Incorporation of Telegroup, Inc.               

  *3.2   Form of Second Restated Articles of Incorporation of Telegroup, Inc.

  *3.3   Bylaws of Telegroup, Inc.                                           

  *3.4   Form of Amended and Restated Bylaws of Telegroup, Inc.              

  *4.1   Form of Common Stock Certificate of Telegroup, Inc.                 

  *4.2   Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4                 

  *4.3   Note and Warrant Purchase Agreement dated as of November 27, 1996   

  *4.4   Form of Warrant to Purchase Class A Common Stock of Telegroup, Inc. 

  *4.5   Indenture dated as of November 27, 1996 between Telegroup, Inc. and 
          The Chase Manhattan Bank                                           

   4.6   Indenture for 8.0% Convertible Notes dated September 30, 1997       
          (Incorporated by reference as Exhibit 4.1 to the Company's Form 10-
          Q for the quarter-ended September 30, 1997, SEC File No. 0-29284)  

   4.7   Indenture for 10.5% Senior Discount Notes dated October 23, 1997    
          (Incorporated by reference as Exhibit 4.2 to the Company's Form 10-
          Q for the quarter-ended September 30, 1997, SEC File No. 0-29284)  

 ++5.1   Opinion of Swidler & Berlin, Chartered regarding legality           

 *10.1   Loan Agreement Dated as of March 28, 1997 by and between the Company
          and American National Bank and Trust Company of Chicago            

 *10.1.1 First Amendment to Loan Agreement between the Company and American  
          National Bank and Trust Companyof Chicago dated as of June 6, 1997.

 *10.2   Amended and Restated 1996 Telegroup, Inc. Stock Option Plan         

 *10.3   Form of Employment Agreement between the Company and Fred Gratzon   

 *10.4   Form of Employment Agreement between the Company and Clifford Rees  

 *10.5   Form of Indemnification Agreement                                   

 *10.6   Registration Rights Agreement among Telegroup, Inc., Greenwich      
          Street Capital Partners, L.P., Greenwich Street Capital Offshore   
          Fund, Ltd., TRV Employees Fund, L.P., The Travelers Insurance      
          Company and The Travelers Life and Annuity Company Dated as of     
          November 27, 1996                                                  

 *10.7   Form of Registration Rights Agreement between the Company and       
          certain Shareholders of the Company                                

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                                                                [Download Table]
                                                                             
*+10.8  Agreement between Telegroup, Inc. and New T & T Hong Kong Limited    

*+10.9  Resale Solutions Switched Services Agreement between Sprint          
         Communications Company L.P. and Telegroup, Inc.                     

 *10.10 Form of Employment Agreement between the Company and John P. Lass    

 *10.11 Form of Employment Agreement between the Company and Ron Jackenthal  

 *10.12 Form of Employment Agreement between the Company and Certain         
         Executive Officers                                                  

  10.13 Notes Registration Rights Agreement between the Company and Smith    
         Barney Inc., and Alex Brown Incorporated Dated as of October 23,    
         1997 (Incorporated by reference as Exhibit 10.13 to the Company's   
         Form S-4 Registration Statement filed on December 22, 1997          

  10.14 Registration Rights Agreement between the Company and Smith Barney   
         Inc. Dated as of September 30, 1997                                 

 *21.1  Subsidiaries of Telegroup, Inc.                                      

  23.1  Consent of KPMG Peat Marwick, LLP                                    

  23.2  Consent of MacIntyre & Co.                                           

++23.3  Consent of Swidler & Berlin, Chartered (to be included in Exhibit 5.1
         to this Registration Statement)                                     

 *24.1  Power of Attorney                                                    

  27.1  Financial Data Schedule                                              

--------                                                                        
* Previously filed as Exhibits to Form S-1, SEC Registration Statement File No. 
333-25065.                                                                  
+ Confidential Treatment has been requested for portions of this document. The  
redated material has been filed separately with the Commission.             
++To be filed by amendment.