UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

       [X] Annual Report pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934
                   For the fiscal year ended December 31, 1997
                                       or
        [ ] Transition Report pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934
             For the transition period from _________ to __________

                         Commission File Number 1-13433

             -------------------------------------------------------
                           EXCEL COMMUNICATIONS, INC.
             (Exact name of registrant as specified in its charter)
             -------------------------------------------------------

          Delaware                                  75-2720091
{State or other jurisdiction of          (IRS Employer Identification No.)
 incorporation or organization)

         8750 North Central Expressway, Suite 2000, Dallas, Texas 75231
               (Address of principal executive offices)         (Zip Code)

                                 (214) 863-8000
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

                                       Name of each exchange
   Title of each Class                  on which registered
Common Stock, $.001 par value         New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:   None

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by  reference in Part III of this Form 10-K or any  adjustment  to
this Form 10-K. [x]

The aggregate  market value of the voting stock (which consists solely of shares
of Common Stock) held by  non-affiliates of the registrant as of March 23, 1998,
computed by  reference  to the closing  sales price of the  registrant's  Common
Stock  on  the  New  York  Stock  Exchange  on  such  date,  was   approximately
$1,170,430,530.

As of March 23, 1998, the registrant had outstanding 131,946,080 shares of $.001
par value common stock.

The following  documents  are  incorporated  by reference  into the part of this
annual report on Form 10-K as indicated:

     Portions of the registrant's definitive Proxy Statement for the 1998 Annual
     Meeting of Stockholders are incorporated by reference into Part III hereof.

                           Exhibit Index on Page 50
<PAGE>



                           EXCEL COMMUNICATIONS, INC.
                         1997 ANNUAL REPORT ON FORM 10-K

                                Table of Contents


                                                                   Page
PART I                                                              No.

Item  1.     Business...........................................      5
Item  2.     Properties.........................................     13
Item  3.     Legal Proceedings..................................     13
Item  4.     Submission of Matters to a Vote of Security Holders     14


PART II

Item  5.     Market for the Registrant's Common Equity and
               Related Stockholder Matters......................     15
Item  6.     Selected Financial Data............................     16
Item  7.     Management's Discussion and Analysis of Financial
               Condition and Results of Operations..............     18
Item  8.     Financial Statements and Supplementary Data........     27
Item  9.     Changes in and Disagreements With Accountant
               on Accounting and Financial Disclosures..........     45

PART III

Item 10.     Directors and Executive Officers of the Registrant.     45
Item 11.     Executive Compensation.............................     45
Item 12.     Security Ownership of Certain Beneficial Owners
               and Management...................................     45
Item 13.     Certain Relationships and Related Transactions.....     45


PART IV

Item 14.     Exhibits, Financial Statement Schedules and
               Reports on Form 8-K..............................     45

Signatures......................................................     46

Index to Exhibits...............................................     49


<PAGE>

                                     PART I

Item 1.   Business

     EXCEL Communications, Inc. is a Delaware corporation and the parent company
of Excelcom, Inc. ("Excelcom"), previously EXCEL Communications, Inc., which was
formed in 1988 and  commenced  operations  in 1989.  On October 14, 1997,  EXCEL
Communications,   Inc.  succeeded  to  the  businesses  of  Excelcom  and  Telco
Communications  Group,  Inc.  ("Telco"),  a  facilities-based  provider  of long
distance  telecommunications  services,  pursuant to the  Agreement  and Plan of
Merger  dated as of June 5, 1997 (the  "Merger").  The Merger  creates the fifth
largest  long  distance  company  in the  United  States  based on the number of
presubscribed  lines,  with  pro  forma  consolidated   annualized  revenues  of
approximately $2 billion,  11 billion annualized long distance minutes of usage,
6.0 million customers, and approximately 100,000 network miles of DS-3 capacity.
All references to the "Company" or "EXCEL" refer to EXCEL  Communications,  Inc.
and include its subsidiaries and predecessors.

     EXCEL provides long distance telecommunications and paging services to both
residential  and  commercial  customers  in the United  States.  The Company has
developed several marketing  channels which include direct sales to residential,
commercial and wholesale customers through independent  representatives ("IRs"),
dealers and direct  sales  personnel  in addition  to direct mail  marketing  of
several dial around products.  These multiple distribution channels which target
both  residential  and  commercial  customers are a key element of the Company's
business  strategy  as they allow the  Company to balance  its  network  traffic
capacity and provide multiple avenues for growth.

     The Company's  presubscribed  residential  services are marketed  primarily
through a network  marketing  system of IRs,  whereby the IRs are  encouraged to
recruit  subscribers with whom they have an ongoing  relationship.  This network
marketing  system has been selected by the Company because the Company  believes
it reduces net marketing  costs,  subscriber  acquisition  costs, and subscriber
attrition.  Historically,  IRs have  predominantly  sold  residential  and small
business  products,  although  the  Company  has  recently  introduced  enhanced
commercial  products  to be sold by the  IRs.  The  Company  believes  that  its
commercial revenues as a percentage of total revenues will increase during 1998.
EXCEL markets its residential  dial around products and services  through Dial &
SaveSM, Long Distance Wholesale ClubSM, and Telco ChoiceSM programs. Dial around
customers   access  the   network  by  dialing  a  unique   five-digit   Carrier
Identification  Code ("CIC  Code")  before  dialing the number they are calling.
Dial around  customers  can use EXCEL's  services at any time  without  changing
their  existing   presubscribed   long  distance   carrier.   EXCEL  also  sells
presubscribed  telecommunications services to wholesale and commercial customers
using a direct sales force and an independent  dealer  organization  through its
Commercial  Sales Division  ("CSD").  As of December 31, 1997, CSD had opened 27
sales offices and employed or  contracted  with  approximately  311 direct sales
personnel,  117 sales management personnel,  275 active dealers and 19 telesales
agents. For the fourth quarter of 1997, CSD's revenues were $56.4 million.

     EXCEL has approximately 3,000 employees who support the corporate,  network
management,  billing,  teleservices and marketing functions of the Company.  The
Company's revenues were $506.7 million for 1995, $1.4 billion for 1996, and $1.5
billion for the year ended December 31, 1997. The Company's pricing structure is
regularly  reviewed so that  subscribers of the Company's long distance  service
generally  pay less than they would for long  distance  service from other major
carriers.

     The Company bills the majority of its presubscribed  residential  customers
and its dial around customers  primarily  through local exchange carrier ("LEC")
billing and collection  agreements which enable the Company to place its charges
on the monthly local phone bills of its  customers.  The Company has  agreements
with LECs,  including all of the Regional Bell  Operating  Companies  ("RBOCs"),
that cover  substantially all of the switched access lines in the United States.
Commercial  customers are billed  directly by the Company.  The Company plans to
directly  bill a  larger  percentage  of its  residential  customers  in  future
periods.

     The Company's  Telco  subsidiary  operates a nationwide  telecommunications
network   consisting  of  seven   switches,   leased   transmission   lines  and
sophisticated  network  management systems designed to optimize traffic routing.
This  switch-based  network  currently  consists  of DSC DEX 600S,  600 and 600E
switches located in Washington, D.C.; Fort Lauderdale, Florida; Davenport, Iowa;
Chattanooga, Tennessee; Austin, Texas; Las Vegas, Nevada and New York, New York.
An additional two switches in Los Angeles,  California  and Cleveland,  Ohio are
being deployed in the first half of 1998.  During 1998,  the Company  intends to
migrate onto this network a substantial  portion of its traffic  currently being
carried by third parties.

     In February  1998, the Company  received its charter for a federal  savings
bank to be located  in Dallas,  Texas  ("FirstEXCEL,  F.S.B." or  "FirstEXCEL").
FirstEXCEL will offer banking services to EXCEL's IRs and employees,  as well as
the community at large. The Company expects  FirstEXCEL to be fully  operational
and open to the public in the second half of 1998.
<PAGE>

Industry Background

     The present long distance  telecommunications  marketplace  was principally
shaped by the 1984  divestiture by AT&T Corp.  ("AT&T") of its 22 Bell Operating
Companies  (''BOCs'').  As part  of the  AT&T  Divestiture  Decree  (''the  AT&T
Decree''),  the United States was divided into  geographic  areas known as Local
Access Transport Areas  (''LATAs'').  The LECs, which include the Bell Operating
Companies and independent LECs,  provide local telephone  service,  local access
services  and  short-haul  toll  service.   Interexchange  carriers  (''IXCs''),
including the Company,  and certain  independent local exchange carriers provide
long distance  service between LATAs  (interLATA  traffic) and within LATAs. The
current  structure  of the  industry is  subject to change as the impacts of the
recently   enacted   Telecommunications   Act  of   1996   are   realized.   See
''Regulation,'' and ''Item 7. Management's  Discussion and Analysis of Financial
Condition   and   Results  of   Operations-Impact   of  New   Telecommunications
Legislation.''

     According to a recent Federal  Communications  Commission (''FCC'') report,
revenues  of  the  U.S.   long   distance   telecommunications   industry   were
approximately  $82 billion in 1996.  The industry is highly  competitive  and is
dominated by four carriers,  AT&T, MCI Telecommunications  Corp. ("MCI"), Sprint
Corporation ("Sprint"), and WorldCom, Inc. (''WorldCom'') which together in 1996
accounted for  approximately 83% of the overall market according to a recent FCC
report. The remainder of the market share is held by several large regional long
distance  companies,  some  with  national  capabilities  such  as the  Company,
Frontier  Communications  Services,  Inc.   (''Frontier''),   Cable  &  Wireless
Communications,  Inc.,  and LCI  International,  Inc.,  and by  several  hundred
smaller companies. According to this FCC report, while industry revenues grew at
a compound  annual rate of over 7% during the period from 1989 through 1996, the
revenues of all carriers other than AT&T, MCI, Sprint,  and WorldCom grew in the
aggregate at an annual compound rate of over 20% during the same period.

Products and Services

Presubscribed Residential Services

     The Company currently offers several discounted residential products to its
presubscribed   residential  customers.  Its  primary  "1-plus"  product  offers
residential  customers a flat rate service which the Company  believes  competes
favorably  against  flat rate  programs  offered by other  major  long  distance
service providers.  In addition, the Company offers several residential products
which provide discounts based on time-of-day. The Company also offers an 800/888
service product to its residential subscribers, which allows subscribers to call
home on an 800/888  number or provide a toll-free  number for family  members to
call home,  in  addition to calling  card  services,  international  service and
directory assistance.

Dial Around Residential Service

     In addition to presubscribed  residential  service, the Company also offers
residential  dial around  services.  Customers  access the Company's  network by
dialing a five-digit  code before the number they are calling,  and,  therefore,
are not required to  permanently  change or cancel their  existing long distance
carrier in order to use the Company's  service.  The Company's dial around rates
offer  customers  savings off of the basic direct dialed  "1-plus" rates and the
competitive flat rates charged by AT&T, MCI, and Sprint.

Commercial Services

     Current  products  include long distance,  calling card,  call  accounting,
enhanced  billing  services,  and 800/888  services.  In addition to competitive
rates and a wide  variety of  products,  the  Company is able to offer  business
customers a highly  specialized  direct bill summary  package that includes call
summaries by service type,  call type,  originating  number,  account code, area
code, country code, time-of-day and most frequently called numbers.

     CSD also sells  dedicated  circuits to  commercial  customers and wholesale
transmission capacity and services to other long distance carriers.  The Company
believes  that the  combination  of a  nationwide  network  and data  processing
resources  provides an opportunity for continuing growth through the wholesaling
of one-stop  telecommunications services to long distance resellers. The Company
offers  a  complete  package  of  networking,   billing  and  customer  service,
eliminating  the need for  resellers to  coordinate  with  multiple  vendors and
giving them the  ability to obtain all of their long  distance  services  from a
single  source.  Additionally,  the Company  provides  reseller  clients  with a
customized  version of its customer  account  database  software,  the TelePhone
Maintenance  system.  While revenue per minute from  wholesale  service sales is
generally lower than the Company's average sales to end users, the cost of sales
and overhead involved in servicing  carrier  customers is also lower.  Moreover,
the  Company  has used the  wholesale  market to more fully  utilize its network
during the  daytime  hours,  the busiest  time of day for many of the  Company's
carrier and reseller customers.
<PAGE>
Paging

     In  March  1996,  the  Company  entered  into  a  Reseller  Agreement  (the
''Reseller  Agreement'')  with PageMart,  Inc.  (''PageMart''),  which is in the
business of providing paging and wireless  communications products and services.
Under  the  Reseller   Agreement,   PageMart  is  required  to  provide,   on  a
non-exclusive  basis,  paging  products and  services to the Company,  including
Narrowband  PCS products  when they become  available to  PageMart's  customers,
which may be resold  nationwide by the Company to its paging  subscribers  under
the common law service mark ''EXCELPaging.''

     In October 1996, the Company began offering both  alphanumeric  and numeric
pagers to its subscribers  through the IRs. The paging services range from local
to national,  and the Company  offers a range of  value-added  paging  services,
including voice mail, universal 800, and personal assistant greetings.

Billing and Data Processing

     Since its inception,  the Company has billed a majority of its  residential
traffic  through  LECs.  The  Company has entered  into  billing and  collection
agreements with LECs,  including all of the RBOCs, that cover  substantially all
of the switched access lines in the U.S. These agreements  permit the Company to
place its customers' call detail records on the customers' regular monthly local
phone bill. The Company also provides  billing  clearinghouse  services to other
unaffiliated long distance carriers.

     Tel Labs, Inc. ("Tel Labs"),  a wholly-owned  subsidiary  offering  billing
services,  processes  raw switch  data into a format that can be used to produce
end-user  billing  invoices.  This data  processing  is  executed  on  specially
designed personal computers operating a proprietary  software program.  Tel Labs
receives certain raw call records directly from the switches,  and prepares them
for rating by determining the answer status,  originating location,  terminating
location and mileage.  The calls are then rated  according to standard  rates or
according to customer specific rates, if applicable. Rated calls are then sorted
depending on which LEC will actually bill the end-user and placed in an industry
standard format ("EMI"). Tel Labs then prepares management reports which provide
the Company with the total number of calls,  minutes and dollars  billed  during
that billing cycle.

Marketing

Presubscribed Residential Products and Services

     The Company markets presubscribed residential services through a nationwide
network of IRs. The Company  encourages IRs to enroll  subscribers with whom the
IRs have an ongoing  relationship as a result of being a family member,  friend,
business  associate,   neighbor,   or  other  acquaintance.   The  Company  also
encourages,  but does not  require,  the IRs to use the  Company's  products and
services  and to  communicate  the  results  of their use of such  products  and
services to their  subscribers.  This network marketing system has been selected
by the  Company  because the Company  believes it reduces net  marketing  costs,
subscriber  acquisition  costs, and subscriber  attrition.  The Company believes
that  subscribers  will be more likely to remain with the Company  because  they
have been  enrolled  with the Company by someone  with whom they have an ongoing
relationship.  The Company also believes that its network  marketing system will
continue to build a base of potential  subscribers  for additional  services and
products.  The  Company  does not  require a person to be an IR in order to be a
subscriber. The Company's network marketing system is particularly attractive to
prospective IRs because of the potential for supplemental income and because the
IRs are not required to purchase any inventory,  have no monthly sales quotas or
account  collection  issues,  have minimal  paperwork,  and have a flexible work
schedule.  The  sales  efforts  of IRs  are  supported  through  various  means,
including  Company-sponsored  training held periodically throughout the year and
motivational satellite broadcast television shows broadcast four times a week.

     IRs are compensated  based on the acquisition of subscribers and their long
distance  usage and paging air time usage.  IRs receive  subscriber  acquisition
commissions  only  after,  among  other  things,  subscribers  sign  up for  the
Company's long distance  service or paging service.  IRs receive  commissions on
the long distance usage and paging air time usage of  subscribers  who they have
personally  signed up. In addition,  while the Company does not pay a commission
to IRs  for  introducing  new  IRs to the  Company,  IRs do  receive  subscriber
acquisition  commissions and long distance and paging air time usage commissions
for  subscribers  signed up by certain  other IRs they have  recruited  directly
themselves or indirectly,  as in the case of subscribers  recruited by other IRs
in their downline.  Certain performance  criteria must be maintained in order to
qualify to receive all such commissions.

     The Company  provides  training to all IRs who have  purchased the optional
management services program. The training includes a detailed explanation of the
Company's  products,  the IR  compensation  plan,  and  the  use of the  various
marketing tools available to the IR. The Company publishes a monthly  newsletter
for   the   IRs   providing   informative   and   motivational   articles   (the
''Communicator''),  as well as recognizing  IR  achievements.  The  Communicator
allows  the  Company  to keep  the IRs up to date on new  promotions,  products,
developments,  and changes to the Company's policies and procedures. The Company
also offers for sale through its  catalogs a wide  variety of  marketing  tools,
audio and videotapes,  visual aids, desk  accessories,  and clothing and novelty
items  designed to assist IRs in their  marketing  efforts  and to promote  name
recognition  of  the  Company.  The  Company  regularly  updates  its  marketing
materials to reflect the  Company's  available  services and products and timely
information about the Company. The Company holds an annual convention,  known as
''ExcelebrationTM,''  for IRs each year. This event provides  recognition to the
top  performers,  direct  access to senior  management,  and a chance for IRs to
share  experiences and develop support  systems.  The Company also  participates
throughout  the country in rallies that current IRs and potential new IRs attend
to learn more about the Company.

     To service its IR base, the Company is currently operating a service center
staffed by service agents who have automated  systems to answer IR questions and
provide IR support.  This system  includes a current  database of all IRs, their
downlines,  and their  subscribers.  The Company also  maintains an  interactive
voice recognition  system that allows IRs 24-hour access to information  through
their touch-tone  phones.  In addition,  the Company has developed a proprietary
commission  processing  system to process the high volumes of data  necessary to
calculate  commissions  on long  distance and paging usage,  commissions  on the
acquisition  of long  distance and paging  subscribers,  and  commissions  on IR
training.  This system  incorporates  the provisions of the Company's  marketing
program to prepare monthly  downline  reports and commission  payment details to
IRs.

Residential Dial Around Products and Services

     The  Company's  residential  dial  around  products  are  marketed  through
marketing  subsidiaries  under  the  Dial &  SaveSM,  Telco  ChoiceSM,  and Long
Distance  Wholesale  ClubSM brand names. The brands are  differentiated  by rate
structure and marketing approach,  and the Company believes that its multi-brand
strategy  heightens market  penetration by broadening  customer exposure to dial
around and appealing to different segments of the population.

     The Company  markets these products and services  primarily  through direct
mail pieces that seek to educate potential  customers  regarding dial around and
its benefits.  Direct mail is targeted  towards  residential  customers within a
specified  geographic  region and  includes a service  explanation  and  dialing
instructions,  a  general  pricing  comparison  and a set of  reminder  stickers
highlighting the Company's CIC Codes for customers to keep near their telephone.

     Prospective  customers  do not need to sign-up or call the  Company to take
advantage of its  discounted  service  offerings  upon  receiving a Company mail
solicitation.  The Company works with various  outside  advertising  agencies to
design the copy and creative  components of the direct mail marketing pieces and
contracts with various  vendors of mail shop and printing  services in an effort
to  ensure  that mail is sent out in a timely  and  cost-effective  manner.  The
Company's data processing resources allow for prompt monitoring of customer long
distance usage and permit the Company to carefully measure response rates to its
direct mail campaigns.  The Company constantly strives to improve response rates
by varying the design and components of its direct mail marketing packages,  and
seeks to engineer the timing of its initial and follow-on  direct mail campaigns
to maximize response rate and grow overall market penetration.  In addition, the
Company also utilizes other media to supplement direct mail.

Commercial Products and Services

     The Company markets its commercial  products and services  through a direct
commercial sales force of  approximately  311 sales  representatives,  117 sales
management  personnel  and an  independent  dealer  organization  consisting  of
approximately 275 active dealers. These sales representatives and dealers office
out of regional  sales  offices  which are located in major  metropolitan  areas
throughout  the United  States.  In  addition,  IRs who have  historically  sold
residential and small business products,  recently began marketing the Company's
commercial  products  and  services  with the help of trained  commercial  sales
representatives. The Company's sales representatives and IRs target a full range
of small and large  business  owners and market the Company's  services  through
personal contacts which emphasize customer service, term plans, network quality,
value-added  services,   reporting,  rating  and  promotional  discounts.  Sales
representatives  are compensated in the form of salary plus commission while IRs
are paid commissions  based upon the acquisition of customers and the customers'
long distance usage.

Subscriber Care

     The Company strives to provide high quality subscriber care and support and
believes  that  personal  contact  with  its  subscribers   through  IRs,  sales
representatives, and customer service representatives is a significant factor in
subscriber  acquisition  and  retention.  The Company  encourages  IRs and sales
representatives  to contact each of their subscribers on a monthly basis to keep
the subscriber satisfied with the Company's long distance and paging service.

     The Company operates four customer service centers staffed by the Company's
customer  service  employees,  who have completed a  certification  and training
program  provided by the Company.  To enhance the  effectiveness of the customer
service  representatives,  the  Company,  in addition  to the  initial  training
program, provides ongoing training to all customer service representatives.  The
Company's customer service department uses on-line,  real-time automated systems
that provide notes from all prior  contacts with the  subscriber,  and provide a
complete  account and payment  history for  subscribers  directly  billed by the
Company.  Through this proprietary contact management  software,  the Company is
able to provide a high level of  subscriber  care.  The  Company  also  provides
subscriber support on a multilingual basis.

Network and Operations

     The Company's  Telco  subsidiary  operates a nationwide  telecommunications
network   consisting  of  seven   switches,   leased   transmission   lines  and
sophisticated  network  management systems designed to optimize traffic routing.
This network currently  originates  traffic in all or some part of 48 states and
the  District of Columbia and  operates as an "open  network",  meaning that any
individual  within the  Company's  originating  service  area whose LEC provides
equal access can access the Company's long distance network by dialing either of
the  Company's  CIC codes,  or by  presubscribing  to the  Company as their long
distance service provider.

     The network provides high quality, reliable transmission and switching. The
Company's network surveillance capabilities, including self-diagnostic software,
generally  enable the Company to  anticipate  and correct  problems  before they
result in service  interruption.  The Company's technicians remotely monitor the
Company's entire network 24 hours a day, 7 days a week, from its Network Control
Centers.  To reduce  the  potential  impact  of any  equipment  or  transmission
failure, the Company can reroute or restore  transmissions through the Company's
standby  transmission  facilities or reroute  traffic over the networks of other
carriers.  The  Company's  technicians  also  monitor the network for fraud on a
real-time  basis,  using  computer  systems  that detect  unusual or high volume
calling patterns.

Switching Facilities

     The Company's Telco subsidiary  currently operates seven DSC Communications
Corporation ("DSC") DEX 600S, 600 and 600E digital  telecommunications  switches
in Fort Lauderdale,  Florida; Davenport, Iowa; Chattanooga,  Tennessee;  Austin,
Texas; Washington, D.C.; Las Vegas, Nevada and New York, New York. An additional
two switches in Los Angeles,  California and Cleveland,  Ohio are being deployed
in the first half of 1998. Switches are digital  computerized routing facilities
that receive calls, route calls through  transmission lines to their destination
and record information about the source,  destination and duration of the calls.
In order for a call to be  completed  through a switch,  there must be two ports
available -- an incoming port and an outgoing port. For example,  if a switch is
equipped with 30,000 ports, the switch can accommodate up to 15,000 simultaneous
telephone calls. The Company's switches are currently  configured with 13,824 to
51,840  equipped  ports.  The  Company's  DEX 600  switches can be expanded to a
configuration  with 30,720  equipped ports while the Company's DEX 600E switches
can be expanded to a configuration with 107,520 equipped ports.

     The Company continually evaluates the capacity and location of the switches
based on current  and  projected  customer  traffic.  In order to  maximize  the
efficiency  of the network,  the Company has recently  entered into an agreement
for the purchase and installation of multiple DSC advanced switching  platforms.
These  technologically  advanced  switches  will increase  network  capacity and
broaden service offerings.  Specifically,  the DSC products include the MegaHubR
600E  tandem  switching  systems as well as the  elements  from its  intelligent
network  ("IN") product line such as the DSC  INfusionSM  Signal  Transfer Point
(STP) W/2 systems, along with other network applications.

Transmission Lines

     The Company  owns  approximately  100,000  network  miles of DS-3  capacity
(under  a  long-term  right  to  use  agreement)  and  also  leases   additional
transmission lines from a variety of  facilities-based  and resale long distance
carriers.  The Company's  contracts  with these  entities  typically  have terms
ranging from 12 to 60 months.  The Company  supplements its leased  "on-network"
capacity with "off-net"  services from a variety of resale and  facilities-based
long distance  carriers.  In addition,  the Company does not have any on-network
international  network arrangements and exclusively resells the network capacity
of other resale and  facilities-based  long distance  carriers to  international
destinations.

Network Management Systems

     Once calls are  originated  and routed  over leased  digital,  transmission
facilities  to the  Company's  nearest  switch  location  and then  routed  on a
least-cost  basis to  either  the  Company's  leased  network  or to an  off-net
supplier for  termination.  The Company  utilizes  Digital  Access Cross Connect
Systems ("DACS") to  electronically  cross-connect  circuits thereby  increasing
call routing and circuit  provisioning  efficiency and providing  better network
monitoring  capabilities.  The Company has installed  Tellabs ABS Titan 5500 3/1
and 530 1/0 DACS  equipment  on all  switches.  In  addition,  the  Company  has
configured a large portion of the network with Signaling System 7 Common Channel
Signaling  ("SS7").  This  network  protocol  reduces  connect  time  delays and
provides  additional  technical  capabilities and efficiencies for call routing.
The Company is currently in the process of deploying SS7 in additional  portions
of the network.

Carrier Agreements

     The Company currently has agreements with Frontier, IXC Long Distance, Inc.
("IXC Long  Distance"),  MCI,  and  WorldCom to provide  switching  services and
network  transmission of its long distance traffic. The agreements with IXC Long
Distance,  MCI, and WorldCom each contain minimum usage  commitments,  while the
agreement  with Frontier  provides for Frontier to be the exclusive  carrier for
certain  calling card calls and  personal 800 service.  The Company is currently
meeting all minimum commitments under these contracts.

Competition

     The long  distance  telecommunications  market is highly  competitive.  The
principal  competitive factors affecting the Company's market share are pricing,
customer  service,  and  diversity  of  products,  services  and  features.  The
Company's ability to compete effectively will depend on its continued ability to
maintain high quality,  market-driven  services at prices  generally equal to or
below those charged by its competitors.

     Several of the  Company's  competitors  are  substantially  larger and have
substantially  greater financial and technical resources.  As the Company grows,
it expects to face  increased  competition,  particularly  from AT&T,  MCI,  and
Sprint. The Company also competes with regional IXCs and resellers for interLATA
long  distance  services  and with local  exchange  carriers for  interLATA  and
intraLATA long distance services.  The Company's pricing strategy is to keep its
rates  generally below those of AT&T,  MCI, and Sprint.  Competition  within the
industry is expected to increase as a result of LECs being  permitted to provide
long distance service as a result of the passage of the  Telecommunications  Act
of 1996. See ''Regulation.''

     Legislative,  judicial, and technological factors have helped to create the
foundation for smaller long distance  providers to emerge as viable  competitive
alternatives  to AT&T,  MCI,  and  Sprint  for long  distance  telecommunication
services. The FCC has required that all IXCs allow the resale of their services,
and the AT&T Decree  substantially  eliminated  different access arrangements as
distinguishing  features among long distance carriers. In recent years, national
and  regional  network  providers  have  substantially  upgraded the quality and
capacity of their  domestic long  distance  networks,  resulting in  significant
excess  transmission  capacity  for  voice  and  data  communications.   Due  to
anticipated advances in telecommunications  transmission technology, the Company
expects  the  resale  of  excess  transmission  capacity  to  continue  to be an
important factor in long distance telecommunications.

Regulatory Developments

     The 1996  Telecommunications  Act opens the local phone services  market to
competition  by requiring LECs to permit  interconnection  to their networks and
establishing,  among other  things,  LEC  obligations  with respect to unbundled
access to network elements,  resale, number portability,  dialing parity, access
to  rights-of-way,  and mutual  compensation.  The legislation also codifies the
LECs' equal access and  nondiscrimination  obligations and preempts inconsistent
state regulation.  In addition, the legislation contains special provisions that
eliminate  the AT&T  Decree  and the GTE  Decree,  thereby  eliminating  certain
restrictions on the BOCs and GTE Operating Companies  (''GTOCs'') from providing
long   distance   services   and   engaging  in   telecommunications   equipment
manufacturing.  These new statutory provisions permit the BOCs to enter the long
distance market under certain circumstances.  As of the date of enactment of the
legislation,  a BOC  is no  longer  restricted  from  providing  interLATA  long
distance  service  outside of those markets in which it provides  local exchange
service  (referred to as  ''out-of-region''  long distance  service).  A BOC may
provide long distance service within the regions in which it also provides local
exchange service (referred to as ''in-region''  service) if it satisfies certain
procedural  and  substantive  requirements  and upon obtaining FCC approval on a
state-by-state  basis. The GTOCs are permitted to enter the long distance market
as of the date of enactment  without regard to  limitations by region,  although
the  necessary  state and/or  federal  regulatory  approvals  that are otherwise
applicable  to the  provision of  intrastate  and/or  interstate  long  distance
service will need to be obtained, and the GTOCs are subject to the provisions of
the  1996   Telecommunications   Act  that  impose   interconnection  and  other
requirements on LECs.

     The  Company  expects  that some or all of the BOCs  will  seek to  provide
out-of-region long distance service. Certain of them have already taken steps to
provide  out-of-region  service in multiple  states.  It is not known when,  and
under what specific  condition,  other applications will be granted by the state
regulatory  commissions in those states. Several of the BOCs have unsuccessfully
sought  authority  from the FCC to provide  in-region  long distance  service in
various  states.  While no  application  has yet been  granted by the FCC, it is
expected that most or all of the BOCs will  eventually  be granted  authority to
provide in-region long distance service in many or all states.

     As required by the 1996  Telecommunications  Act, in August  1996,  the FCC
adopted new rules implementing certain provisions of the 1996 Telecommunications
Act (the ''Interconnection  Orders''). These rules are designed to implement the
pro-competitive,  deregulatory  national policy  framework of the new statute by
removing or minimizing the regulatory,  economic, and operational impediments to
competition for facilities-based  and resold local services,  including switched
local exchange service.  Although setting minimum,  uniform, national rules, the
Interconnection  Orders also rely  heavily on states to apply these rules and to
exercise their own discretion in implementing a pro-competitive  regime in their
local telephone markets.  The Interconnection  Orders are primarily important to
the Company at this time insofar as they establish the basis for the cost to the
Company  of  providing   resold  local   services.   Consistent  with  the  1996
Telecommunications  Act, the  Interconnection  Orders require  incumbent LECs to
offer their  telecommunications  services at retail prices minus avoided  costs.
The  Interconnection  Orders also require,  among other things,  that  intraLATA
presubscription (pursuant to which LECs must allow customers to choose different
carriers for  intraLATA  toll service  without  having to dial extra  digits) be
implemented no later than February 1999. Portions of the Interconnection  Orders
were struck down by the U.S.  Eighth  Circuit Court of Appeals in 1997,  but the
United States Supreme Court has agreed to review the lower court  decision.  The
Supreme  Court is expected to issue a decision in the first half of 1999. In the
meantime,  certain of the rules adopted in the Interconnection Orders, including
rules  that  concern  the  wholesale  pricing  of  local  services,   cannot  be
implemented.  Nevertheless,  the Company  generally  believes  the trend  toward
increased competition and deregulation of the  telecommunications  industry will
be accelerated by the 1996 Telecommunications Act and subsequent developments.

     The  1996  Telecommunications  Act  also  addresses  a wide  range of other
telecommunications issues that will potentially impact the Company's operations,
including  provisions  pertaining  to  regulatory  forbearance  by the FCC;  the
imposition  of  additional   liability   for  the   unauthorized   switching  of
subscribers'  long  distance  carriers;  the creation of new  opportunities  for
competitive local service providers;  provisions  pertaining to interconnection;
provisions  pertaining  to  universal  service  and access  charge  reform;  and
requirements  pertaining  to the  treatment  and  confidentiality  of subscriber
network information.  The legislation requires the FCC to conduct a large number
of  proceedings  to adopt rules and  regulations  to implement the new statutory
provisions and requirements. It is unknown at this time precisely the nature and
extent of the impact that the legislation and regulatory  developments will have
on the Company.

     The  Company  has  applied  for  authority  to expand  its  existing  state
authorizations  to provide resold local exchange service in certain states. As a
result of the opening of this market, the Company is in the process of obtaining
state  authority,  where  necessary,  to  provide  resold  local  services  as a
complement to its long distance services. Resold local exchange service is a new
service development,  and there can be no assurance of how local exchange resale
will be  implemented  or what  effect it will  have on  competition  within  the
telecommunications  industry  generally  or on the  competitive  position of the
Company specifically. To the extent that the Company converts from a reseller to
a  facilities-based  carrier,  modification  or amendment of the Company's state
certifications  may be  required.  As of  December  31,  1997,  the  Company  is
certified to provide resold local exchange services in 31 states.

Regulation

     The terms and conditions  under which the Company  provides  communications
services are subject to government regulation.  Federal laws and FCC regulations
generally  apply  to  interstate  telecommunications,   while  particular  state
regulatory authorities generally have jurisdiction over  telecommunications that
originate  and  terminate  within the same state.  In  addition,  the  Company's
network  marketing  system is or may be  subject  to or  affected  by  extensive
federal and state regulation.

Federal

     The  Company  is  classified  by the  FCC as a  non-dominant  carrier,  and
therefore  is  subject  to  minimal   federal   regulation.   After  the  recent
reclassification of AT&T as a non-dominant  carrier in its provision of domestic
services, only the LECs are classified as dominant carriers for the provision of
interstate  access  services.  As a  consequence,  the FCC regulates many of the
rates,  charges,  and services of the LECs to a greater degree than the Company.
The  FCC  has  proposed   that  the  BOCs  offering   out-of-region   interstate
interexchange  services be regulated as non-dominant  carriers,  as long as such
services  are offered by an  affiliate  of the BOC that  complies  with  certain
structural  separation  requirements,  which may make it easier  for the BOCs to
compete directly with the Company for long distance subscribers.

     The  FCC  generally   does  not  exercise   direct   oversight   over  cost
justification  and the level of charges  for service of  non-dominant  carriers,
such as the Company,  although it has the statutory power to do so. Non-dominant
carriers are required by statute to offer interstate and international  services
under rates,  terms,  and conditions that are just,  reasonable,  and not unduly
discriminatory.   The  FCC  imposes  only  minimal  reporting   requirements  on
non-dominant  carriers,  although  the Company is subject to certain  reporting,
accounting,  and record keeping obligations.  A number of these requirements are
imposed,  at least in part,  on all carriers and others are imposed on carriers,
such as the Company, whose annual operating revenues exceed $100 million.

     In addition,  informal  complaints are lodged from time to time against the
Company before the FCC and various state agencies for various reasons,  to which
the Company has timely  responded.  Although  such  complaints  could  result in
additional legal actions or proceedings  being brought against the Company,  the
Company  believes that such matters will be  satisfactorily  resolved  without a
material adverse impact upon the Company's results of operations;  however,  the
Company can not be assured of such resolution.  Should the Company's belief with
respect  to any and all  complaints  pending  before the FCC be  incorrect,  the
Company could be subject to financial penalties and potential  revocation of its
operating authority for interstate or intrastate calls, as applicable.

     The Company  currently has separate tariffs on file with the FCC,  covering
its  domestic  interstate  services  and  international  services.  Although the
tariffs of non-dominant  carriers,  and the rates and charges they specify,  are
subject to FCC review,  they are presumed to be lawful and are seldom contested.
Resale  carriers,  like all other  interstate  carriers,  are also  subject to a
variety  of  miscellaneous  FCC  regulations  that,  for  instance,  govern  the
documentation and verifications necessary to change a subscriber's long distance
carrier,  limit the use of ''800'' numbers for  pay-per-call  services,  require
disclosure of certain  information if operator  assisted  services are provided,
and govern interlocking directors and management.

     On December 31, 1997, the U.S.  District Court for the Northern District of
Texas in Wichita Falls found Sections 271-275 of the  Telecommunications  Act to
be  unconstitutional.   These  provisions  require  the  BOCs  to  meet  certain
requirements as a condition to providing in region long distance  services.  The
District Court subsequently stayed the December 31, 1997 order pending review by
a federal  court of appeals,  which is expected  to be  completed  by the end of
1998. This stay restores to the  telecommunications  industry for the time being
the regulatory status it had before the December 31, 1997 ruling.

State

     The  Company is subject to varying  levels of  regulation  in the states in
which  it is  currently  authorized  to  provide  intrastate  telecommunications
services.  The vast  majority  of the states  require  the  Company to apply for
certification to provide intrastate  telecommunications services, or to register
or to be found exempt from regulation, before commencing intrastate service. The
vast  majority of states also require the Company to file and maintain  detailed
tariffs  listing  their rates for  intrastate  service.  Many states also impose
various  reporting  requirements  and/or require prior approval for transfers of
control  of   certified   carriers,   and/or  for   corporate   reorganizations;
acquisitions of  telecommunications  operations;  assignments of carrier assets,
including subscriber bases; carrier stock offerings;  and incurrence by carriers
of  significant  debt  obligations.  Certificates  of authority can generally be
conditioned,  modified,  canceled,  terminated,  or revoked by state  regulatory
authorities for failure to comply with state law and/or the rules,  regulations,
and policies of the state  regulatory  authorities.  Fines and other  penalties,
including  the  return  of all  monies  received  for  intrastate  traffic  from
residents of a state,  may be imposed for such  violations.  If state regulatory
agencies  conclude  that the  Company  has taken  steps  without  obtaining  the
required authority, they may impose one or more of the sanctions listed above.

Network Marketing

     The Company's  network marketing system is or may be subject to or affected
by  extensive  government  regulation,   including,  without  limitation,  state
regulation of marketing  practices and federal and state regulation of the offer
and sale of business  franchises,  business  opportunities,  and securities.  In
addition,  the Internal  Revenue Service and state taxing  authorities in any of
the 50 states  where the Company has IRs could  classify the IRs as employees of
the Company (as opposed to independent  contractors).  The Company believes that
it is in  compliance  with the  requirements  of  federal  and state  regulatory
authorities and maintains  communications  regularly with the various regulatory
authorities  in  each   jurisdiction.   A  final   determination  by  any  other
jurisdiction that the IRs are employees could cause the Company to be subject to
penalties and interest for taxes not  withheld,  require the Company to withhold
taxes in the future,  and require  the  Company to pay  unemployment  insurance.
Additionally,  an adverse  determination  by any one state could  influence  the
decisions of regulatory  authorities in other jurisdictions.  Any or all of such
factors  could  adversely  affect the way the Company  does  business  and could
affect the Company's  ability to attract  potential IRs.  While the  regulations
governing  network  marketing  are  complex  and vary from  state to state,  the
Company  believes  that  it is in  compliance  with  and has  from  time to time
modified its network marketing system to comply with  interpretations of various
regulatory authorities.

     Various  governmental  agencies monitor direct selling activities,  and the
Company has  occasionally  been  requested to supply  information  regarding its
marketing plan to certain of such agencies.  Although the Company  believes that
its  network  marketing  system  is in  substantial  compliance  with  laws  and
regulations  of each state relating to direct  selling  activities,  there is no
assurance that legislation and regulations  adopted in particular  jurisdictions
in the future will not adversely affect the Company's operations.

Employees

     As of December 31, 1997, the Company employed  approximately  3,000 people.
This  number  does  not  include  IRs,  who are  classified  by the  Company  as
independent  contractors  rather than  employees of the Company.  The  Company's
employees are not unionized,  and the Company believes its relationship with its
employees is good.

<PAGE>

Item 2.   Properties

     The Company is headquartered  in Dallas,  Texas and operates out of several
leased and owned facilities consisting of an aggregate of 1,138,900 square feet.
The following table provides summary  information  regarding these facilities as
of March 1, 1998:
<TABLE>
<CAPTION>
                                                                                 Approximate            Leased or
        Function                             Location                          Square Footage             Owned
        -------------------------------      ------------------------        ------------------        -----------

        <S>                                  <C>                                         <C>             <C>
        General & Administrative             Dallas, TX                                  344,500         Leased
        General & Administrative             Chantilly, VA                                40,200         Leased
        General & Administrative             Chicago, IL                                  14,700         Leased
        FirstExcel, F.S.B.                   Dallas, TX                                   12,500         Leased
        Commercial Sales Division            (1)                                         193,500         Leased
        Service & Distribution Center        Addison, TX                                 289,000          Owned
        Service Center                       Houston, TX                                  57,900         Leased
        Service Center                       Reno, NV                                     48,000         Leased
        Service Center                       Chantilly, VA                                80,000          Owned
        Service Center                       Arlington, VA                                14,500         Leased
        Switch Site                          Los Angeles, CA                               6,200         Leased
        Switch Site                          Washington, D.C.                              3,600         Leased
        Switch Site                          Fort Lauderdale, FL                           4,100         Leased
        Switch Site                          Davenport, IA                                 3,500         Leased
        Switch Site                          Las Vegas, NV                                 5,000         Leased
        Switch Site                          New York, NY                                  6,500         Leased
        Switch Site                          Cleveland, OH                                 5,000         Leased
        Switch Site                          Chattanooga, TN                               5,400         Leased
        Switch Site                          Austin, TX                                    4,800         Leased


     (1) At December  31,  1997,  the Company had 27 leased CSD offices  located
         throughout the United States.
</TABLE>

Item 3.   Legal Proceedings

     On August 30, 1996, AT&T filed suit in the United States District Court for
the  District  of  Delaware   against  the  Company,   its   subsidiary,   EXCEL
Communications Marketing, Inc., and EXCEL Telecommunications, Inc. alleging past
and continued  infringement of a single patent without  specifying the amount of
damages. The Court granted summary judgment in favor of Excel on March 27, 1998.
The Court held that the claims being  asserted  against Excel were  unpatentable
under U.S. patent laws. The Company expects AT&T to appeal this decision.

<PAGE>

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

     Excelcom  held a special  meeting of  Stockholders  on October  11, 1997 in
connection  with the business  combination  with Telco.  Holders of common stock
voted at the special  meeting on the following four matters which were set forth
in the Joint Proxy Statement of Excelcom and Telco dated September 15, 1997.

              (a) To approve the Merger Agreement and the transactions
                  contemplated thereby.

                  Votes:
                  ------
                  For: .....................     97,934,860
                  Against: .................         31,019
                  Abstain: .................         54,289
                  Broker non-votes*: .......      1,208,663

              (b) To approve the Excel Communications, Inc. 1997 Stock
                  Option Plan.

                  Votes:
                  ------
                  For: .....................     94,006,322
                  Against: .................      3,886,219
                  Abstain: .................        127,627
                  Broker non-votes*: .......      1,208,663

              (c) To approve the Excel Communications, Inc. 1997 Director
                  Stock Option Plan.

                  Votes:
                  ------
                  For: .....................    98,117,856
                  Against: .................       300,008
                  Abstain: .................       170,512
                  Broker non-votes*: .......       640,455

              (d) To authorize proxies to vote upon any other business
                  that may properly come before the meeting or any
                  adjournment thereof.

                  Votes:
                  ------
                  For: .....................    98,540,160
                  Against: .................       366,314
                  Abstain: .................       322,357
                  Broker non-votes*: .......          None

                  *  Broker non-votes occur when a broker holding stock
                     in street name does not vote these shares.

<PAGE>

                                     PART II

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

     In May 1996, EXCEL's common stock, par value $.001 per share, began trading
on the New York Stock  Exchange  under the symbol  ''ECI.'' The following  table
sets  forth,  on a per share  basis,  the  range of the high and low sale  price
information  of  shares  of  common  stock as  reported  by the New  York  Stock
Exchange,  for the periods  indicated during the fiscal years ended December 31,
1997 and 1996.
<TABLE>
<CAPTION>

                                             Market Price Per Share
                                --------------------------------------------
                                          1997                     1996
                                         ------                   ------
                                 High             Low         High      Low
                                --------       --------      ------    ------
          <S>                   <C>            <C>           <C>       <C>
          First Quarter........ 21  5/8        13            N/A       N/A
          Second Quarter....... 29  3/8        12   3/8      47        25 1/2
          Third Quarter........ 28  7/8        20 11/16      31 7/8    19 1/2
          Fourth Quarter....... 28 15/16       14   1/8      35 1/2    20


     As of March 23, 1998 there were  approximately  3,491 registered holders of
EXCEL's common stock.
</TABLE>

     The Company has in the past declared dividends, including a dividend in the
amount of $20.0 million  declared by the Company's  predecessor  on December 31,
1995 to its then existing shareholders, which the Company paid during the second
quarter of 1996. However,  the Company does not intend to pay any cash dividends
with respect to its common stock in the foreseeable  future. The Company's Board
of Directors  will determine the Company's  dividend  policy in the future based
upon,  among  other  things,  the  Company's  results of  operations,  financial
condition,   business   opportunities,    capital   requirements,    contractual
restrictions, and other factors deemed relevant at the time.

<PAGE>

Item 6.   Selected Financial Data

     The following table sets forth selected consolidated financial data for the
Company as of the dates and for the periods indicated.  The data set forth below
in this  table  should  be read  in  conjunction  with  ''Item  7.  Management's
Discussion and Analysis of Financial  Condition and Results of Operations''  and
the Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
                                                                             Year ended December 31,
                                                          --------------------------------------------------------
                                                             1993     1994        1995       1996         1997 (1)
                                                           -------- ---------  ---------   ---------    ----------
                                                                    (In thousands, except per share
                                                                           and per minute data)
<S>                                                         <C>       <C>       <C>        <C>         <C>
Statement of Operations Data:
Revenues:
   Communication services................................  $ 24,198 $ 108,819  $ 363,301   $1,090,649   $1,333,101
   Marketing services(2).................................     6,650    43,339    143,397      260,653      121,251
                                                           -------- ---------  ---------   ----------   ----------
Total revenues...........................................    30,848   152,158    506,698    1,351,302    1,454,352
                                                           -------- ---------  ---------   ----------   ----------
Operating expenses:
   Communication.........................................    13,761    58,925    209,995      596,598      716,781
   Depreciation and amortization.........................       190       346      1,239        6,880       23,676
   Selling, general and administrative...................    13,351    66,157    217,751      530,295      504,421
   Non-recurring charges (3).............................        --        --         --           --       64,637
                                                           -------- ---------  ---------   ----------   ----------
Total operating expenses.................................    27,302   125,428    428,985    1,133,773    1,309,515
                                                           -------- ---------  ---------   ----------   ----------
Operating income.........................................     3,546    26,730     77,713      217,529      144,837
                                                           -------- ---------  ---------   ----------   ----------
Interest expense.........................................       (75)     (295)      (593)        (261)      (8,551)
Other income (expense)...................................        24        83     (5,781)      12,647        7,301
                                                           -------- ---------  ---------   ----------   ----------
Income before income taxes...............................     3,495    26,518     71,339      229,915      143,587
Provision for income taxes...............................     1,126    10,648     26,893       85,488       55,661
                                                           -------- ---------  ---------   ----------   ----------
Income before cumulative effect of change
   accounting principle..................................     2,369    15,870     44,446      144,427       87,926
Cumulative effect of change in accounting principle,
   net of income taxes (4)...............................        --        --         --           --       65,214
                                                           -------- ---------  ---------   ----------   ----------
Net income...............................................  $  2,369  $ 15,870  $  44,446    $ 144,427   $   22,712
                                                           ======== =========  =========   ==========   ==========
Diluted earnings per common and equivalent share:
Income  per share  before  cumulative  effect of change in
   accounting principles, net of income taxes (5)........  $   0.03  $   0.18  $    0.46    $    1.35   $     0.76
Cumulative effect of change in accounting principle,
   net of income taxes on earnings per share (5).........        --        --         --           --        (0.56)
                                                           -------- ---------  ---------   ----------   ----------
Diluted earnings per share (5) ..........................  $   0.03  $   0.18  $    0.46    $    1.35   $     0.20
                                                           ======== =========  =========   ==========   ==========
Cash dividends declared per share........................  $     --  $  0.046  $   0.202    $      --   $       --
                                                           ======== =========  =========   ==========   ==========
Supplemental Operating Data:
Long distance minutes of usage (in 000's)(6).............   118,357   544,552  2,101,240    6,271,203    7,902,190
Weighted average long distance revenue per minute
   of usage(7)...........................................  $  0.204  $  0.200  $   0.173    $   0.175   $    0.166
Weighted average communication charges per minute
   of usage(8)...........................................  $  0.116  $  0.108  $   0.100    $   0.095   $    0.089

Balance Sheet Data:
Working capital, net.....................................  $   (186) $  7,134  $   1,071    $ 209,227   $   31,599
Property and equipment, net..............................       662     2,476      8,560       76,912      281,847
Total assets.............................................     9,058    59,412    203,581      579,164    1,637,016
Long-term obligations, net of current maturities.........       313     3,369        345          100      477,292
Stockholders' equity.....................................     1,995    13,635     37,708      322,281      752,707

     (1)  On October 14, 1997, the Company  completed its merger with Telco. The
          Merger was  accounted  for as a purchase;  accordingly,  the operating
          results for Telco are  included  in the  Company's  operating  results
          after October 14, 1997, the effective  date of the Merger.  See Note 3
          to the Consolidated Financial Statements.
     (2)  Revenues  from  marketing  services  include the effect of deferring a
          portion of the cash  received  during each period and  amortizing  the
          deferred  revenues  over 12  months.  See  Note 1 to the  Consolidated
          Financial Statements.
     (3)  Results  for 1997  include  $64.6  million  in  non-recurring  charges
          primarily  related to the  consolidation and integration of Telco. See
          Note 4 to the Consolidated Financial Statements.
     (4)  Effective January 1,1997, the Company changed its method of accounting
          for subscriber acquisition costs. See Note 1, "Marketing  Activities",
          to  the  Consolidated  Financial  Statements.
     (5)  See Note 8 to the Consolidated Financial Statements for an explanation
          of the number of shares used in computing earnings per share.
     (6)  Long  distance   minutes  of  usage  represent   minutes  billable  to
          subscribers  during the period.
     (7)  Weighted  average  long  distance  revenue per minute of usage  equals
          revenues for all long distance phone services divided by the aggregate
          minutes of usage.
     (8)  Weighted average  communication charges per minute of usage equals the
          cost  of all  long  distance  phone  services  sold  to the  Company's
          subscribers divided by the aggregate minutes of usage.
</TABLE>
<PAGE>

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

     Certain  statements set forth in this report are forward looking statements
that involve a number of risks and uncertainties.  Among many factors that could
cause actual  results to differ  materially  are the  following:  the  Company's
ability to manage rapid growth; the Company's ability to attract,  maintain, and
motivate  a large  base of  IRs;  litigation  including  that  with  independent
representatives  ("IRs"),  regulation and management of IRs;  competition in the
long distance  telecommunications  and paging industries;  the Company's ongoing
relationship  with its long distance  carriers;  dependence  upon key personnel;
subscriber  attrition;  the adoption of new, or changes in, accounting policies,
practices,  and estimates and the application of such policies,  practices,  and
estimates;  federal  and  state  governmental  regulation  of the long  distance
telecommunications or direct selling industry;  the Company's ability to develop
and manage its own long distance  network;  the  Company's  ability to maintain,
operate,  and upgrade its information  systems; and the Company's success in the
offering of paging and other additional communications products and services.

General

     EXCEL provides long distance telecommunications and paging services to both
residential  and  commercial  customers  in the United  States.  The Company has
developed several marketing  channels which include direct sales to residential,
commercial  and  wholesale  customers  through  IRs,  dealers  and direct  sales
personnel in addition to direct mail marketing of several dial around  products.
These  multiple   distribution   channels  which  target  both  residential  and
commercial  customers  are a key element of the Company's  business  strategy as
they allow the  Company to balance  capacity  of  network  traffic  and  provide
multiple avenues for growth.

     The Company's  Telco  subsidiary  operates a nationwide  telecommunications
network   consisting  of  seven   switches,   leased   transmission   lines  and
sophisticated  network  management systems designed to optimize traffic routing.
This network currently  originates  traffic in all or some part of 48 states and
the  District of Columbia and  operates as an "open  network",  meaning that any
individual  within the Company's  originating  service area,  whose LEC provides
equal access,  can access the Company's long distance  network by dialing either
of the Company's CIC codes,  or by  presubscribing  to the Company as their long
distance service provider.

     The Company  owns  approximately  100,000  network  miles of DS-3  capacity
(under  a  long  term  right  to  use  agreement)  and  also  leases  additional
transmission lines from a variety of  facilities-based  and resale long distance
carriers.  The Company's  contracts  with these  entities  typically  have terms
ranging from 12 to 60 months.  The Company  supplements its leased  "on-network"
capacity with "off-net"  services from a variety of resale and  facilities-based
long distance  carriers.  In addition,  the Company does not have any on-network
international  network arrangements and exclusively resells the network capacity
of other resale and  facilities-based  long distance  carriers to  international
destinations.

     The Company currently has agreements with Frontier Communications Services,
Inc.  ("Frontier"),   IXC  Long  Distance,  Inc.  ("IXC  Long  Distance"),   MCI
Telecommunications  Corp. ("MCI"),  and WorldCom,  Inc.  ("WorldCom") to provide
switching  services and network  transmission of its long distance  subscribers'
traffic.  The agreements with IXC Long Distance,  MCI, and WorldCom each contain
minimum  usage  commitments,  while the agreement  with  Frontier  provides that
Frontier  is to be the  exclusive  carrier for  certain  calling  card calls and
personal 800 service.  The Company is currently meeting all minimum  commitments
under these contracts. During 1998, the Company intends to migrate a substantial
portion of its traffic  currently  being  carried by third  parties onto its own
network and to continue to meet its minimum commitments.

     The  Company's  revenues  primarily  consist of revenues for  communication
services  and  marketing  services.  Revenues  for  communication  services,  as
reflected in the Company's  Consolidated  Financial  Statements,  are net of the
effect of certain adjustments,  including those for unbillable call records. The
Company's long distance  subscribers  are located  throughout the United States,
and the Company completes  subscriber calls to all directly  dialable  locations
worldwide.  The Company bills its  subscribers  for long distance usage based on
the type of calls,  time of calls,  duration  of calls,  the  terminating  phone
numbers, and each subscriber's rate plan in effect at the time of the call.

     Marketing  services  revenues  are  primarily  comprised  of  receipts  for
materials and services rendered by EXCEL to IRs and area  coordinators  ("ACs").
Except  in  certain  states,  IRs are  required  to make an  initial  refundable
application  deposit  with EXCEL as an  expression  of  commitment.  There is no
additional  cost to  participate.  IRs have an option  to  purchase  a  start-up
package, which includes a training class and training materials, business forms,
promotional and presentation  materials,  ongoing  technical and  administrative
support services, and monthly reports. If the start-up package is purchased, the
application  deposit  requirement is waived. In addition,  EXCEL offers training
positions  whereby ACs,  certified by the Company,  provide training to new IRs.
The portions of the marketing  services revenues received that relate to ongoing
technical and  administrative  support  services are deferred and amortized over
the period in which the services are used in order to match those  revenues with
the costs of providing the related support services.

     Operating  expenses  include   communication   charges,   depreciation  and
amortization,  and selling, general and administrative  expenses.  Communication
charges include the costs of operating the Company's network and amounts paid by
the Company based on the Company's  subscribers' long distance and paging usage.
The Company pays its carriers based on the type of calls, time of certain calls,
duration of calls, the terminating phone numbers, and the terms of the Company's
contract in effect at the time of the calls.

     Selling, general and administrative expenses consist of marketing costs and
the costs of providing  teleservices and other support services for subscribers,
billing and collecting long distance and paging  revenues,  and the costs of the
information systems and personnel required to support the Company's  operations.
Marketing costs include commissions paid to IRs and sales  representatives,  the
costs of  providing  training,  business  forms,  promotional  and  presentation
materials, technical and administrative support services, and monthly reports to
IRs, salaries and commissions paid to CSD sales representatives, and direct mail
advertising expenses.  Commissions paid to IRs are based upon the acquisition of
new long distance and paging subscribers  ("subscriber  acquisition  costs") and
long distance  telephone and paging usage by subscribers.  The Company also pays
commissions for the training of IRs and certain ACs.  Effective January 1, 1997,
the Company changed its method of accounting for subscriber  acquisition  costs.
Previously,  the Company had deferred the  portions of  commissions  paid to IRs
that directly relate to the acquisition of long distance and paging subscribers.
Beginning  January  1,  1997,  the  Company  began  fully  expensing  subscriber
acquisition  costs in the  period  incurred  in order to present  its  operating
results in a manner  more  consistent  with other  telecommunications  companies
against which its results are now compared.

EXCEL and Telco Merger

     On October 14,  1997,  EXCEL  succeeded to the  businesses  of Excelcom and
Telco as a result of mergers of wholly-owned subsidiaries with and into Excelcom
and Telco, pursuant to the Agreement and Plan of Merger dated as of June 5, 1997
(the  "Merger").  The Merger creates the fifth largest long distance  company in
the United  States based on the number of  presubscribed  lines,  with pro forma
consolidated  annualized  revenues  of  approximately  $2  billion,  11  billion
annualized  long  distance  minutes  of  usage,  6.0  million   customers,   and
approximately  100,000  network miles of DS-3  capacity.  (See Note 3-"EXCEL and
Telco Merger".)

     At the closing of the Merger on October 14,  1997:  (i)  Excelcom and Telco
became  wholly-owned  subsidiaries  of  EXCEL;  (ii) each  outstanding  share of
Excelcom  common stock  converted  into the right to receive one share of common
stock of EXCEL;  (iii) each  outstanding  share of Telco common stock  converted
into the right to receive  0.7595  shares of common stock of EXCEL and $15.00 in
cash;  (iv) except for certain  options,  each then  outstanding and unexercised
option to  acquire  one share of Telco  common  stock was  assumed  by EXCEL and
converted into an option to acquire 1.5190 shares of EXCEL common stock, and the
exercise  price per share with respect to each such assumed  option was adjusted
to equal the exercise  price under the original  option  divided by 1.5190;  (v)
each then  outstanding and  unexercised  option to acquire one share of Excelcom
common  stock was assumed by EXCEL and  converted  into an option to acquire one
share of EXCEL common  stock,  and the exercise  price per share was  unchanged.
Consideration  for the Merger  consisted  of $666.2  million in cash  (including
$164.5  million  of Telco debt paid by EXCEL)  and  25,376,506  shares of common
stock, $.001 par value, of the Company ("Company Common Stock").

     On October 14, 1997, EXCEL made an initial borrowing of approximately  $544
million  under the new credit  facility to fund the cash  purchase  price of the
Merger and related costs and expenses and to refinance existing  indebtedness of
Telco. The initial LIBOR spread and Prime spread were 1.0% and 0%, respectively.
(See Note 5 - "Long-Term Debt and Capital Lease Obligations".)

     The merger of Telco into EXCEL has been  accounted for under the "purchase"
method of  accounting,  with EXCEL as the acquirer in accordance  with generally
accepted  accounting  principles.  The results of operations  for the year ended
December 31, 1997 include Telco's  financial results after October 14, 1997, the
effective  date of the  Merger.  The merger  with Telco  resulted in goodwill of
$906.6 million which is being amortized straight-line over a period of 40 years.

Non-Recurring Charges

     During the fourth quarter of 1997, primarily as a result of the Merger, the
Company  initiated  plans to  reorganize  and  restructure  its  management  and
operational  organization  and  facilities  to eliminate  duplicate  facilities,
abandon certain  projects and activities,  and to take further  advantage of the
synergies available to the combined entities.  Accordingly,  the Company charged
to  operations  the estimated  costs of such  reorganization  and  restructuring
activities in addition to certain legal  expenses,  vendor  disputes,  and other
charges.  These costs amount to $64.6 million and are included in  non-recurring
charges in the Company's Consolidated Statement of Operations.
<PAGE>

     The  following  table  reflects the  components  of the  significant  items
included in non-recurring  charges for the year ended December 31, 1997 (amounts
in thousands):
                                                              Year Ended
                                                            December 31, 1997
                                                            -----------------

    Reduction in carrying value of certain assets..........     $ 47,678
    Costs to exit unfavorable contracts....................        5,559
    Legal expenses, vendor disputes, and other charges.....       11,400
                                                                --------
         Non-recurring charges.............................     $ 64,637
                                                                ========

     Current and future issues  affecting the Company's  operations for 1998 and
beyond include the following:

     Ability of the Company to Migrate  Traffic.  The Company's  realization  of
operating cost savings from the Merger will be affected by the Company's ability
to direct traffic to its network from EXCEL's existing third party carriers in a
timely manner,  which is expected to result in an overall lower cost per minute.
The Company's ability to migrate this traffic in a timely manner will be limited
by  operational  and  network  infrastructure  limitations  as  well  as by  the
continuing purchase commitment  requirements under EXCEL's agreements with third
party carriers.

     Regulatory  Changes.  The  operations  of the Company  will  continue to be
affected by the ongoing events associated with the 1996  Telecommunications Act.
Such  events   include   access  charge  reform  which  could  change   existing
transmission costs for both the Company and other long distance  companies,  the
entry  by  the  Regional  Bell  Operating   Companies  into  the  long  distance
marketplace,  and the  ability of long  distance  companies  like the Company to
begin marketing local telephone services.

     In  conjunction  with upcoming  local  competition,  incumbent  local phone
companies are not likely to provide billing services for customers presubscribed
to  competitive  local phone  companies.  This would force the Company to either
bill the customer directly,  enter into a billing and collection  agreement with
new local phone companies or seek other alternatives.

     Additionally,  the Federal  Communications  Commission has mandated that by
June 30, 1998, all telecommunications companies must migrate from their existing
five-digit CIC codes (10 + XXX) to seven-digit  CIC codes (10 + 10 + XXX).  This
will  require a change in the dialing  patterns of the Telco  Consumer  Division
customers  in order to  utilize  the  Company's  services,  and the  Company  is
required  to  integrate   re-education   materials  into  its  future  marketing
activities.

     Competitive Factors. The Company has observed increased  competition in all
of  its  distribution  channels  as  well  as  an  increase  in  the  number  of
promotional,  discounted calling plans available to all long distance consumers,
particularly  relating to residential  customers.  The impact to the Company has
included (i) a decline in the  Company's  residential  revenue per minute as the
Company has responded to competitive  pressures with lower priced products,  and
(ii) a sequential decline in dial around revenues.

     Network  Costs.  The Company is in the process of expanding  its network in
order to  facilitate  the on-net  migration of traffic  that is currently  being
carried by third  parties.  This will result in an increase in  recurring  fixed
costs  associated with the network which the Company  anticipates will be offset
by reductions in third party costs for switch services. However, the Company may
experience a temporary  increase in overall  network costs as  additional  fixed
costs are incurred in anticipation of the migration of traffic.

     Integration of the Companies.  The Merger  involves the  integration of two
companies  that  have  previously  operated  independently  and  there can be no
assurance  that the  Company  will not  encounter  significant  difficulties  in
integrating  the  respective  operations of EXCEL and Telco  including,  but not
limited to,  integrating,  documenting,  and operating certain software systems;
retaining key employees;  and integrating other operational  functions,  or that
the benefits  expected from such  integration  will be realized.  These benefits
include the migration of EXCEL traffic from third parties to the Telco  network,
the expansion of commercial  products to be sold by the IRs with the  assistance
of Telco's  commercial  sales force,  reduced capital spending and reductions in
various general and administrative expenses.

     Increased  Customer  Acquisitions.  During the fourth  quarter of 1997, the
Company  observed an increase in its  acquisition  of new customers  through its
network marketing  channel.  In connection with the Company's IR marketing plan,
an upfront customer  acquisition  commission is typically paid before a customer
has  generated  material  usage  revenue.   In  a  period  of  customer  growth,
commissions paid for new customers can exceed the corresponding profit generated
by the additional revenue in the current period and thus reduce net income.

     Expansion of Commercial  Sales. The Company intends to continue to grow its
level of commercial  sales. As a result,  the Company expects to see an increase
in its commercial  revenues as a percentage of total revenues.  Since commercial
products  tend to  generally  yield a lower rate per minute,  the Company  could
experience  a  decrease  in its  overall  revenue  per  minute  and a decline in
operating margins.

     Year 2000  Issue.  The Year 2000 issue is the risk that  computer  programs
using two-digit date fields will fail to properly  recognize the Year 2000, with
the result being business  interruptions  due to computer system failures by the
Company's  software  and  hardware  or  that  of  government  entities,  service
providers,  vendors and  customers.  In  response  to the Year 2000  issue,  the
Company has  developed a plan to assess the  Company's  Year 2000 risk and is in
the process of  performing  its review.  The Company  anticipates  that  certain
software will require replacement or modification. Based on the Company's review
to date, it does not expect the cost of software  replacement or modification to
be material to its financial position or results of operations.

Results of Operations

Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996

     Revenues.  Total revenues increased 7.1% to $1.5 billion for the year ended
December  31,  1997 from $1.4  billion  for the year ended  December  31,  1996.
Communication  services  revenues  increased  18.2% to $1.3 billion for the year
ended  December 31, 1997 from $1.1 billion for the year ended  December 31, 1996
primarily due to an increase in long distance  minutes of usage by  subscribers.
Long distance  minutes of usage  increased  25.4% to 7.9 billion minutes for the
year  ended  December  31,  1997 from 6.3  billion  minutes  for the year  ended
December 31, 1996  primarily due to the inclusion of Telco's  minutes  beginning
October 15, 1997.  Long distance  revenues per minute of usage decreased by 5.1%
to 16.6 cents per minute for the year ended  December  31,  1997 from 17.5 cents
per minute for the year ended  December 31, 1996.  This  decrease in revenue per
minute of usage is due  primarily  to the  inclusion of Telco's  commercial  and
wholesale  minutes  which  yield a lower  revenue  per minute  than  residential
minutes.  Included in communication services revenue for the year ended December
31, 1997 is net paging revenue of $24.6 million.

     Marketing services revenues, which include revenues recognized from IRs for
training,  business  forms,  promotional  and  presentation  materials,  ongoing
technical and administrative  support services,  and monthly reports,  decreased
53.5% to $121.3 million for the year ended December 31, 1997 from $260.7 million
for the year ended December 31, 1996,  primarily due to a decrease in the number
of applications received from new IRs.

     Operating Expenses. Communication charges increased 20.1% to $716.8 million
for the year ended  December  31,  1997 from  $596.6  million for the year ended
December 31, 1996.  Communication charges were 8.9 cents per minute for the year
ended  December  31,  1997  compared  to 9.5 cents per minute for the year ended
December  31,  1996.  As  a  percentage  of  communication   services  revenues,
communication  charges were 53.8% for the year ended  December 31, 1997 compared
to 54.7% for the year ended  December 31, 1996.  This decrease in  communication
charges as a percentage of communication  services revenues primarily relates to
the  reduction in per minute rates from the Company's  long  distance  carriers,
resulting from migrating  long distance  traffic from Frontier to WorldCom,  MCI
and IXC Long Distance.

     Depreciation  and  amortization  increased  from $6.9  million for the year
ended  December 31, 1996 to $23.7  million for the year ended  December 31, 1997
primarily  due to  amortization  of  goodwill  resulting  from the Merger and an
increase in depreciation resulting from assets acquired in the Merger.

     Selling,  general  and  administrative  expenses  decreased  4.9% to $504.4
million for the year ended  December  31, 1997 from $530.3  million for the year
ended December 31, 1996.  Selling  expenses,  which include  commissions paid to
IRs, the costs of providing training,  and other administrative support services
to IRs,  and  since  the  Merger,  salaries  and  commissions  paid to CSD sales
representatives  in addition to direct mail  advertising  costs,  decreased from
$362.4  million for the year ended  December 31, 1996 to $278.0  million for the
year ended December 31, 1997,  primarily due to a decrease in the number of IRs.
General and  administrative  expenses increased from $167.9 million for the year
ended  December 31, 1996 to $226.4 million for the year ended December 31, 1997.
This increase  primarily  relates to the inclusion of Telco's  operating results
after  October 14, 1997.  As a percentage of  communication  services  revenues,
selling,  general  and  administrative  expenses  were  37.8% for the year ended
December 31, 1997 compared to 48.6% for the year ended December 31, 1996.

     Included in the Company's  operating  expenses for the year ended  December
31, 1997 is $64.6  million in  non-recurring  charges  primarily  related to the
consolidation and integration of Telco. (See "Non-Recurring  Charges" and Note 4
to the Consolidated Financial Statements.)

     Operating  income before  non-recurring  charges  decreased  3.7% to $209.5
million for the year ended  December  31, 1997 from $217.5  million for the year
ended  December 31, 1996. As a percentage of  communication  services  revenues,
operating income before non-recurring  charges was 15.7% and 19.9% for the years
ended December 31, 1997 and 1996, respectively.

     The Company's interest expense increased to $8.6 million for the year ended
December  31, 1997 from  $261,000  for the year ended  December  31,  1996.  The
increase in interest  expense results  primarily from the payment of interest on
debt incurred to fund the acquisition of Telco on October 14, 1997.

     Other  income  (expense)  decreased  to $7.3  million  for the  year  ended
December  31, 1997 from $12.6  million  for the year ended  December  31,  1996.
Included  in other  income  (expense)  for the year ended  December  31, 1996 is
approximately  $6.2 million of income  related to the sale of the  Company's 49%
investment in a joint venture. In addition,  interest income increased from $6.5
million for the year ended  December 31, 1996 to $7.3 million for the year ended
December  31,  1997.  The  increase  in  interest  income was  primarily  due to
additional  interest  income  generated by the  investment of cash received from
operations and the net proceeds  received from the sale of the Company's  common
stock in the IPO in May 1996 offset by cash used to fund the  repurchase  of the
Company's common stock.

     Included in the  Company's  net income of $22.7  million for the year ended
December 31, 1997 is a one-time  charge of $65.2  million,  net of income taxes,
($0.56 per share) in the first quarter to reflect the change in  accounting  for
subscriber  acquisition  costs. The Company had net income of $144.4 million for
the year ended December 31, 1996. On a pro forma basis, the Company's net income
for the year ended  December 31, 1996 would have been $121.8  million ($1.14 per
share) if this accounting change had been retroactively applied.

Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995

     Revenues.  Total revenues increased 176% to $1.4 billion for the year ended
December 31, 1996 from $506.7  million for the year ended December 31, 1995. The
increase in revenues was primarily due to increases in long distance  minutes of
usage by  subscribers  and in the number of  applications  from new IRs and ACs.
Communication  services  revenues  increased  203% to $1.1  billion for the year
ended  December  31, 1996 from $363.3  million for the year ended  December  31,
1995.  Long distance  minutes of usage increased 200% to 6.3 billion minutes for
the year ended  December  31, 1996 from 2.1  billion  minutes for the year ended
December 31, 1995.

     Marketing services revenues, which include revenues recognized from IRs for
training,  business  forms,  promotional  and  presentation  materials,  ongoing
technical and administrative  support services,  and monthly reports,  increased
82% to $260.7  million for the year ended  December 31, 1996 from $143.4 million
for the year ended December 31, 1995. These revenues increased  primarily due to
the growth in applications from new IRs.

     The Company experienced operational difficulties late in the second quarter
of 1996 due to the failure of Frontier  to add the  network  capacity  needed to
handle the  Company's  growth in its  subscriber  base and related long distance
traffic. The Company believes that the blockage experienced in several states as
a result of the network  capacity  problems  resulted in a slowdown in marketing
activities,  the loss of subscribers,  and reduced  calling  activity during the
third quarter.  By the end of the third  quarter,  90% of the 1-plus traffic had
been  migrated to the  networks  of new  carriers.  However,  the  magnitude  of
migrating more than 4 million subscribers across approximately 900 LECs to three
new networks  created some  disruption in the flow of data between the LECs, the
underlying carriers, and EXCEL. These migration difficulties continued to impact
subscriber   attrition   and  call  volume  in  the  fourth   quarter  of  1996.
Additionally,  the amount of time and management  resources required to meet the
aggressive  schedule  for the  network  migration  conflicted  with  programming
requirements  related  to new  marketing  positions  which  were  introduced  in
September 1996 at the Company's  annual IR convention.  The extensive  amount of
programming  resources needed for the new marketing  positions caused some delay
in the  processing of  transactions  involving the IRs which in turn  negatively
affected IR morale.  As a result,  the number of applications  received from IRs
decreased in the fourth quarter of 1996 from the third quarter of 1996.

     Operating Expenses.  Communication charges increased 184% to $596.6 million
for the year ended  December  31,  1996 from  $210.0  million for the year ended
December 31, 1995.  Communication charges were 9.5 cents per minute for the year
ended  December  31,  1996  compared to 10.0 cents per minute for the year ended
December  31,  1995.  As  a  percentage  of  communication   services  revenues,
communication  charges were 54.7% for the year ended  December 31, 1996 compared
to 57.8% for the year ended  December 31, 1995.  This decrease in  communication
charges  as  a  percentage  of  communication  services  revenues  reflects  the
reduction in rates from Frontier that were  implemented  from April 1995 through
February  1996,  and the lower rates  associated  with  migrating  long distance
traffic to WorldCom, MCI and IXC Long Distance.

     Depreciation and amortization increased 475% from $1.2 million for the year
ended  December 31, 1995 to $6.9  million for the year ended  December 31, 1996.
This increase was primarily due to an increase in  depreciation  on  information
systems and other  assets  acquired to support  the growth in the  business  and
enhance service to subscribers.

     Selling,  general  and  administrative  expenses  increased  143% to $530.2
million for the year ended  December  31, 1996 from $217.8  million for the year
ended  December  31,  1995.  Selling  expenses,  which  directly  relate  to the
Company's  marketing  activities and which include  commissions and the costs of
providing  training,  business forms,  promotional and  presentation  materials,
technical and administrative  support services,  and monthly reports,  increased
147% to $362.4  million for the year ended December 31, 1996 from $146.7 million
for the year ended  December 31, 1995.  This increase is primarily due to growth
in new IRs. General and administrative expenses increased 136% to $167.9 million
for the year  ended  December  31,  1996 from $71.1  million  for the year ended
December  31, 1995.  This  increase  was  primarily  driven by the growth in the
Company's  communication  operations and was due in part to the cost of building
the Company's  management team and information  systems necessary to support the
growth in the business and enhance  service to  subscribers.  As a percentage of
communication services revenues,  selling,  general and administrative  expenses
were 48.6% for the year ended  December 31, 1996  compared to 59.9% for the year
ended December 31, 1995.

     Operating  income  increased  180% to  $217.5  million  for the year  ended
December 31, 1996 from $77.7 million for the year ended  December 31, 1995. As a
percentage of communication  services  revenues,  operating income was 19.9% for
the year ended  December 31, 1996 compared to 21.4% for the year ended  December
31, 1995.

     Included in other income  (expense) for the year ended December 31, 1996 is
approximately  $6.2 million of income related to the Company's 49% investment in
a joint venture.  For the year ended December 31, 1995, the Company recognized a
loss of $6.2 million related to start-up costs incurred by the joint venture. In
addition,  the Company's  interest income increased to $6.5 million for the year
ended  December 31, 1996 from $467,000 for the year ended December 31, 1995. The
increase in interest  income was  primarily due to  additional  interest  income
generated by the investment of cash.

     Income  Taxes.  The  provision  for income taxes as a percentage  of income
before income taxes  decreased to 37.2% in 1996 from 37.7% in 1995. The decrease
is primarily  attributable to lower overall state income tax rates applicable to
1996 consolidated earnings.

Inflation

     Management  believes that  inflation  has not had a material  effect on the
Company's results of operations.

Liquidity and Capital Resources

     As of December 31, 1997, the Company had cash and cash equivalents of $16.2
million and working capital of $31.6 million. The Company's operating activities
provided cash of  approximately  $130.2  million for the year ended December 31,
1997 and $101.5 million for the year ended December 31, 1996.

     The Company's investing activities have consisted primarily of cash paid in
connection  with the Telco Merger of $475.6  million,  the purchase of franchise
agreements  of $3.5  million,  and  property  and  equipment  purchases of $63.7
million for the year ended December 31, 1997. The Company purchased property and
equipment totaling $75.5 million for the year ended December 31, 1996.

     Total cash  generated  from  financing  activities  was $258.8  million and
$113.4 million for the years ended December 31, 1997 and 1996, respectively. The
increase in cash generated from financing activities for the year ended December
31,  1997 was  primarily  due to net  proceeds  received  from the  issuance  of
long-term debt in connection with the Merger and net proceeds  received from the
issuance of additional  common stock due to the exercise of stock  options.  For
the year  ended  December  31,  1996,  the  Company  received  net  proceeds  of
approximately  $133.9  million  for the sale of its common  stock in its initial
public  offering.  In addition,  other  financing  activities  have consisted of
payments  of debt  and  capital  lease  obligations  and the  repurchase  of the
Company's  common stock.  During the year ended  December 31, 1997,  the Company
made  payments  on debt and  capital  lease  obligations  of $297.7  million and
repurchased  the  Company's  common  stock for $56.7  million.  The Company made
payments on debt and capital  lease  obligations  of  $479,000  and  payments of
dividends of approximately $20.0 million during the year ended 1996.

     On October 10, 1997,  the Company  entered  into a new credit  facility for
borrowings up to $1 billion (the "New Credit  Facility").  Borrowings  under the
New Credit  Facility are  available  for general  corporate  purposes  including
acquisitions and are subject to various financial  covenants.  The interest rate
on the New Credit  Facility is based on the Company's  prevailing debt ratio and
ranges on a Eurodollar (LIBOR) option from a spread of 0.625% to 1.75%, and on a
Base  (Prime)  Rate  option  from  a  spread  of 0% to  0.50%.  Total  borrowing
availability  under the New Credit Facility reduces to $800 million on September
30, 2000, and to $500 million on September 30, 2001, and the New Credit Facility
expires on September 30, 2002.

     On October 14, 1997, approximately $135.2 million of the Company's cash and
cash  equivalents  was used to fund a portion of the Telco  Merger  and  related
costs.  Also,  on October 14,  1997,  the Company  made an initial  borrowing of
approximately  $544  million  under  the New  Credit  Facility  to fund the cash
purchase  price of the Merger and related  costs and  expenses  and to refinance
existing  indebtedness of Telco.  The initial LIBOR spread and Prime spread were
1.0% and 0%, respectively.

     The Company believes that its existing sources of liquidity and anticipated
funds from  operations,  will be  sufficient  to fund its capital  expenditures,
working capital, and other cash requirements through the end of 1998.

     Various legal  proceedings  have arisen against the Company in the ordinary
course of business.  Information with respect to legal  proceedings is set forth
in Part I, Item 3. of this Form 10-K.

Regulatory Issues

     On February 8, 1996, the 1996  Telecommunications Act was enacted into law.
This  comprehensive   federal  legislation  will  affect  every  sector  of  the
telecommunications  industry.  Included in the new  statutory  provisions is the
opening up of local telephone markets to competition from  facilities-based  and
resale  carriers  and,  subject  to certain  requirements  and  safeguards,  the
elimination of restrictions on Bell Operating  Company ("BOC") and GTE Operating
Company ("GTOC") entrance into the long distance  telecommunications market. The
FCC adopted rules to govern the  introduction of new forms of competition in its
August 8, 1996 Interconnection  Orders,  significant aspects of which, including
provisions governing the wholesale pricing of local service,  were overturned by
the U.S. Eighth Circuit Court of Appeals.  The U.S.  Supreme Court has agreed to
hear appeals of this decision, but it is not expected to render a final decision
until  early 1999.  Therefore,  it is unknown at this time  whether  this Eighth
Circuit decision will be upheld or what impact the 1996  Telecommunications  Act
or the Interconnection Orders will have on the Company.  Depending on the nature
and timing of BOC and GTOC entry into the long distance market,  the Company may
face  significant  additional  competition  in the  provision  of long  distance
services.  However,  the 1996  Telecommunications  Act opens the local telephone
market to  competition,  which,  depending  on the nature of such  opening,  the
Company  believes  may allow it to provide  resold  local  exchange  services in
several  states.  As of December 31, 1997,  the Company is authorized to provide
resold local exchange services in 31 states.

     Various  governmental  agencies monitor direct selling activities,  and the
Company has  occasionally  been  requested to supply  information  regarding its
marketing plan to certain of such agencies.  Although the Company  believes that
its  network  marketing  system  is in  substantial  compliance  with  laws  and
regulations  of each state relating to direct  selling  activities,  there is no
assurance that legislation and regulations  adopted in particular  jurisdictions
in the future will not adversely affect the Company's operations.


<PAGE>

Quarterly Results of Operations

     The following table includes  summarized  quarterly financial data for each
of the four quarters of 1996 and 1997. This quarterly  information is unaudited,
has been prepared on the same basis as the annual financial statements,  and, in
the opinion of the Company's  management,  reflects all adjustments  (consisting
only of normal recurring  adjustments)  necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
                                                            1996                                          1997
                                       -------------------------------------------------------------------------------------------
                                          First       Second     Third     Fourth      First       Second      Third     Fourth
                                         Quarter     Quarter    Quarter    Quarter    Quarter     Quarter     Quarter    Quarter (1)
<S>                                    <C>         <C>         <C>        <C>        <C>          <C>         <C>       <C>

                                              (In thousands, except per share and per minute data)
Statement of Operations Data:
Revenues:
  Communication services.............. $ 205,274   $ 271,926   $ 299,623  $ 313,826   $ 303,673   $ 292,926   $ 294,430   $ 442,072
  Marketing services(2)...............    75,516      73,439      67,036     44,662      27,694      37,648      30,892      25,017
                                       ---------   ---------   ---------  ---------   ---------   ---------   ---------   ---------
Total revenues........................   280,790     345,365     366,659    358,488     331,367     330,574     325,322     467,089
                                       ---------   ---------   ---------  ---------   ---------   ---------   ---------   ---------
Operating expenses:
  Communication.......................   113,514     151,421     162,299    169,364     165,246     157,239     153,061     241,235
  Depreciation and amortization.......       607       1,179       1,911      3,183       3,561       4,369       4,710      11,036
  Selling, general and administrative.   113,274     136,123     142,295    138,603     108,790     111,712     116,345     167,574
  Non-recurring charges (3)...........        --          --          --         --          --          --          --      64,637
                                       ---------   ---------   ---------  ---------   ---------   ---------   ---------   ---------
Total operating expenses..............   227,395     288,723     306,505    311,150     277,597     273,320     274,116     484,482
                                       ---------   ---------   ---------  ---------   ---------   ---------   ---------   ---------
Operating income (loss)...............    53,395      56,642      60,154     47,338      53,770      57,254      51,206     (17,393)
Interest expense......................       (52)        (79)       (117)       (13)        (21)        (11)        (11)     (8,508)
Other income (expense)................     1,544       4,683       4,291      2,129       2,136       2,050       2,153         962
                                       ---------   ---------   ---------  ---------   ---------   ---------   ---------   ---------
Income (loss) before income taxes.....    54,887      61,246      64,328     49,454      55,885      59,293      53,348     (24,939)
Provision (benefit) for income taxes..    20,901      22,826      23,401     18,360      20,789      22,294      20,059      (7,481)
                                       ---------   ---------   ---------  ---------   ---------   ---------   ---------   ---------
Income (loss) before cumulative effect
 of change in accounting principle....    33,986      38,420      40,927     31,094      35,096      36,999      33,289     (17,458)
Cumulative effect of change in
 accounting principle, net of
 income taxes (4).....................        --          --          --         --      65,214          --          --          --
                                       ---------   ---------   ---------  ---------   ---------   ---------   ---------   ---------
Net income (loss)..................... $  33,986   $  38,420   $  40,927  $  31,094   $ (30,118)  $  36,999   $  33,289   $ (17,458)
                                       =========   =========   =========  =========   =========   =========   =========   =========
Diluted net income (loss) per common
 and equivalent share:
Income (loss) per share before
 cumulative effect of change in
 accounting  principle (5)............ $    0.34   $    0.36   $    0.37  $    0.28   $   (0.32)  $    0.34   $    0.31   $   (0.14)
Cumulative effect of change in
 accounting principle, net of
 income taxes (5).....................        --          --          --         --       (0.59)         --          --          --
                                       ---------   ---------   ---------  ---------   ---------   ---------   ---------   ---------
Diluted net income (loss) per share(5) $    0.34   $    0.36   $    0.37  $    0.28   $   (0.27)  $    0.34   $    0.31   $   (0.14)
                                       =========   =========   =========  =========   =========   =========   =========   =========
Supplemental Operating Data:
Long distance minutes of usage
 (in 000's)(6)........................ 1,227,713   1,554,057   1,679,957  1,809,476   1,718,485   1,584,816   1,694,600   2,904,289
Weighted average long distance revenue
 per minute of usage(7)............... $   0.167   $   0.175   $   0.178  $   0.174   $   0.176   $   0.182   $   0.172   $   0.149
Weighted average communication charges
  per minute of usage(8).............. $   0.092   $   0.097   $   0.097  $   0.094   $   0.096   $   0.096   $   0.089   $   0.082


(1)  On October 14,  1997,  the  Company  completed  its merger with Telco.  The
     Merger was accounted for as a purchase;  accordingly, the operating results
     for Telco are included in the Company's operating results after October 14,
     1997,  the  effective  date of the Merger.  See Note 3 to the  Consolidated
     Financial Statements.
(2)  Revenues from marketing  services include the effect of deferring a portion
     of the cash  received  during  each  period  and  amortizing  the  deferred
     revenues over 12 months. See Note 1 to the Consolidated
     Financial Statements.
(3)  Results for 1997 include $64.6 million in non-recurring  charges  primarily
     related to the  consolidation  and integration of Telco.  See Note 4 to the
     Consolidated Financial Statements.
(4)  Effective January 1, 1997, the Company changed its method of accounting for
     subscriber  acquisition  costs. See Note 1, "Marketing  Activities," to the
     Consolidated Financial Statements.
(5)  See Note 8 to the Consolidated  Financial  Statements for an explanation of
     the number of shares  used in  computing  net  income  per share.
(6)  Long distance  minutes of usage represent  minutes  billable to subscribers
     during the period.
(7)  Weighted  average long distance revenue per minute of usage equals revenues
     for all long distance  phone services  divided by the aggregate  minutes of
     usage.
(8)  Weighted average  communication charges per minute of usage equals the cost
     of all long  distance  phone  services  sold to the  Company's  subscribers
     divided by the aggregate minutes of usage.
 </TABLE>

<PAGE>


                           EXCEL COMMUNICATIONS, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Item 8.   Financial Statements and Supplementary Data


Report of Independent Public Accountants...........................      28

Consolidated Balance Sheets........................................      29

Consolidated Statements of Operations..............................      30

Consolidated Statements of Stockholders' Equity....................      31

Consolidated Statements of Cash Flows..............................      32

Notes to Consolidated Financial Statements.........................      33


<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders and Board of Directors
of EXCEL Communications, Inc.:

     We have  audited  the  accompanying  consolidated  balance  sheets of EXCEL
Communications, Inc. (a Delaware corporation) and subsidiaries (the ''Company'')
as of December 31, 1996 and 1997,  and the related  consolidated  statements  of
operations,  stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated  financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the financial position of the Company as of December
31, 1996 and 1997, and the results of its operations and its cash flows for each
of the three years in the period  ended  December  31, 1997 in  conformity  with
generally accepted accounting principles.

     As explained in Note 1 to the consolidated financial statements,  effective
January 1, 1997,  the Company  changed its method of accounting  for  subscriber
acquisition costs.


Dallas, Texas
January 26, 1998                                            ARTHUR ANDERSEN LLP


<PAGE>
<TABLE>
<CAPTION>
                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)


                                                                                                 December 31,
                                                                                        ---------------------------
                                                                                           1996            1997
                                      ASSETS                                            ----------     ------------
<S>                                                                                    <C>             <C>

Current assets:
     Cash and cash equivalents......................................................    $  169,846     $     16,161
     Accounts receivable, net.......................................................       206,309          328,309
     Inventories....................................................................        16,263            3,651
     Deferred income tax asset......................................................         1,897           34,128
     Other current assets...........................................................         2,517           14,217
                                                                                        ----------     ------------
                                                                                           396,832          396,466
                                                                                        ----------     ------------
Property and equipment, net.........................................................        76,912          281,847
                                                                                        ----------     ------------
Deferred subscriber acquisition costs...............................................       104,765               --
                                                                                        ----------     ------------
Goodwill............................................................................            --          943,682
                                                                                        ----------     ------------
Deferred income tax asset...........................................................            --            3,684
                                                                                        ----------     ------------
Other assets........................................................................           655           11,337
                                                                                        ----------     ------------
                                                                                        $  579,164     $  1,637,016
                                                                                        ==========     ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable...............................................................    $  132,770     $    199,853
     Commissions payable............................................................        22,484           22,265
     Accrued liabilities............................................................        32,112          137,777
     Other current liabilities......................................................            --            4,296
     Current maturities of long-term debt and capital lease obligations.............           239              676
                                                                                        ----------     ------------
                                                                                           187,605          364,867

Long-term debt and capital lease obligations........................................           100          477,292
                                                                                        ----------     ------------
Deferred management services fees and other long-term liabilities...................        25,279           42,150
                                                                                        ----------     ------------
Deferred income taxes payable.......................................................        43,899               --
                                                                                        ----------     ------------
Commitments and contingencies.......................................................            --               --
                                                                                        ----------     ------------
Stockholders' equity:
     Preferred stock, $0.001 par value, 10,000,000 shares authorized, none
        outstanding.................................................................            --               --
     Common stock, $0.001 par value, 500,000,000 shares authorized, 108,800,000 and
       132,679,709 issued; 108,800,000 and 132,613,909 outstanding..................           109              133
     Additional paid-in capital.....................................................       139,880          548,519
     Unrealized gain on securities available for sale...............................            --               21
     Treasury stock, 65,800 shares at cost..........................................            --             (970)
     Retained earnings..............................................................       182,292          205,004
                                                                                        ----------     ------------
          Total stockholders' equity................................................       322,281          752,707
                                                                                        ----------     ------------
                                                                                        $  579,164     $  1,637,016
                                                                                        ==========     ============

     The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)


                                                         Years Ended December 31,
                                                  -------------------------------------
<S>                                               <C>         <C>           <C>
                                                     1995         1996          1997
Revenues:                                         ----------  -----------   -----------
     Communication services.....................  $  363,301  $ 1,090,649   $ 1,333,101
     Marketing services.........................     143,397      260,653       121,251
                                                  ----------  -----------   -----------
          Total revenues........................     506,698    1,351,302     1,454,352
                                                  ----------  -----------   -----------
Operating expenses:
     Communication..............................     209,995      596,598       716,781
     Depreciation and amortization..............       1,239        6,880        23,676
     Selling, general and administrative........     217,751      530,295       504,421
     Non-recurring charges......................          --           --        64,637
                                                  ----------  -----------   -----------
          Total operating expenses..............     428,985    1,133,773     1,309,515
                                                  ----------  -----------   -----------
          Operating income......................      77,713      217,529       144,837

     Interest expense...........................        (593)        (261)       (8,551)
     Other income (expense).....................      (5,781)      12,647         7,301
                                                  ----------  -----------   -----------
Income before income taxes......................      71,339      229,915       143,587
                                                  ----------  -----------   -----------
     Provision for income taxes.................      26,893       85,488        55,661
                                                  ----------  -----------   -----------

Income before cumulative effect of change in
     accounting principle.......................      44,446      144,427        87,926
Cumulative effect of change in accounting
     principle net of income taxes..............          --           --        65,214
                                                  ----------  -----------   -----------

Net income......................................  $   44,446  $   144,427   $    22,712
                                                  ==========  ===========   ===========

   Basic earnings per share.....................  $     0.46  $      1.38   $      0.20
                                                  ==========  ===========   ===========

Diluted earnings per common and equivalent share:

   Weighted average number of shares and share
     equivalents outstanding....................      97,321      107,247       115,547
                                                  ==========  ===========   ===========

   Income before cumulative effect of change in
     accounting principle.......................  $     0.46  $      1.35   $      0.76

   Cumulative effect of change in accounting
     principle net of income taxes..............          --           --         (0.56)
                                                  ----------  -----------   -----------

   Diluted earnings per share...................  $     0.46  $      1.35   $      0.20
                                                  ==========  ===========   ===========


     The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                 EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

                               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                    (In thousands, except per share data)


                                                                   Unrealized
                                                                     Gain on
                                           Additional              Securities
                                    Common  Paid-in     Unearned    Available           Treasury Retained  Total
                             Shares Stock    Capital  Compensation   for Sale  Shares   Stock   Earnings  Equity

<S>                          <C>     <C>    <C>        <C>           <C>       <C>     <C>       <C>       <C>
Balance, January 1, 1995...  100,000 $  100 $    345   $    --       $  --     (1,000) $  (13)  $ 13,203 $ 13,635
 Net income................       --     --       --        --          --         --      --     44,446   44,446
 Dividends declared
  ($.202 per share)........       --     --       --        --          --         --      --    (19,784) (19,784)
 Advances to employee
  stock ownership
  plan.....................       --     --       --    (6,000)         --         --      --         --   (6,000)
 Allocation of common
  stock to employees.......       --     --    1,569     3,842          --         --      --         --    5,411
 Cancellation of
  treasury stock...........   (1,000)    (1)     (12)       --          --      1,000      13         --       --
                            -------- ------ --------   -------       -----      -----  ------   -------- --------
Balance, December 31, 1995.   99,000     99    1,902    (2,158)         --         --      --     37,865   37,708
 Net income..............         --     --       --        --          --         --      --    144,427  144,427
 Issuance of common
  shares in public
  offering...............      9,800     10  133,860        --          --         --      --         --  133,870
 Allocation of common
  stock to employees......        --     --    4,118     2,158          --         --      --         --    6,276
                            -------- ------ --------   -------       -----      -----  ------   -------- --------

Balance, December 31, 1996.  108,800    109  139,880        --          --         --      --    182,292  322,281
 Net income................       --     --       --        --          --         --      --     22,712   22,712
 Issuance of common
  stock....................   26,633     27  464,351        --          --         --      --         --  464,378
 Unrealized gain on
  securities available
  for sale.................       --     --       --        --          21         --      --         --       21
 Purchase of treasury
  stock....................       --     --       --        --          --     (2,819)(56,685)        --  (56,685)
 Cancellation of
  treasury stock...........   (2,753)    (3) (55,712)       --          --      2,753  55,715         --       --
                            -------- ------ --------   -------       -----      -----  ------   -------- --------
Balance, December 31, 1997.  132,680 $  133 $548,519   $    --       $  21        (66) $ (970)  $205,004 $752,707
                            ======== ====== ========   =======       =====      =====  ======   ======== ========


     The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                                             Years Ended December 31,
                                                                        -------------------------------
                                                                           1995       1996       1997
                                                                        ---------  ---------  ---------
<S>                                                                    <C>         <C>        <C>

Operating activities:
     Net income.......................................................  $  44,446  $ 144,427  $  22,712
     Adjustments to reconcile net income to net cash provided by
        operating activities:
          Cumulative effect of change in accounting principle.........         --         --     65,214
          Depreciation and amortization...............................      1,239      6,880     23,676
          Non-recurring charges.......................................         --         --     64,637
          ESOP compensation...........................................      5,627      6,276         --
          Loss on disposal of assets..................................         --        224        152
          (Income) losses from joint venture..........................      6,248     (6,248)        --
          Deferred income taxes.......................................     12,759     25,136     (5,063)
          Changes in assets and liabilities:
             Accounts receivable, net.................................    (61,836)  (115,882)     2,616
             Deferred subscriber acquisition costs....................    (51,413)   (36,399)        --
             Accounts payable.........................................     48,813     67,654     47,568
             Commissions payable......................................     16,169      1,598       (219)
             Deferred management services fees and other long-term
               liabilities............................................     15,802      3,988    (23,214)
             Accrued liabilities......................................      8,932     18,290    (68,503)
             Income taxes payable.....................................      2,171     (4,974)    (5,566)
             Inventories and other....................................     (1,996)    (9,446)     6,216
                                                                        ---------  ---------  ---------
          Net cash provided by operating activities...................     46,961    101,524    130,226
                                                                        ---------  ---------  ---------
Investing activities:
     Proceeds from sale of assets ....................................         --         --         47
     Purchase of property and equipment...............................     (7,323)   (75,456)   (63,720)
     Acquisition of Telco, net of cash acquired ......................         --         --   (475,566)
     Purchase of franchise agreement..................................         --         --     (3,514)
     Investment in joint venture......................................     (6,003)        --         --
                                                                        ---------  ---------  ---------
          Net cash used in investing activities.......................    (13,326)   (75,456)  (542,753)
                                                                        ---------  ---------  ---------
Financing activities:
     Payments of debt and capital lease obligations...................     (3,069)      (479)  (297,734)
     Proceeds from issuance of long-term debt.........................         --         --    615,000
     Debt issuance costs..............................................         --         --     (6,330)
     Purchase of treasury stock.......................................         --         --    (56,685)
     Payments of dividends............................................     (3,000)   (20,000)        --
     Advances to employee stock ownership plan........................     (6,000)        --         --
     Equity issuance costs............................................         --         --     (4,644)
     Net proceeds from issuance of common stock.......................         --    133,870      9,235
                                                                        ---------  ---------  ---------
          Net cash (used in) provided by financing activities.........    (12,069)   113,391    258,842
                                                                        ---------  ---------  ---------

Net increase (decrease) in cash and cash equivalents..................     21,566    139,459   (153,685)
     Cash and cash equivalents, beginning of period...................      8,821     30,387    169,846
                                                                        ---------  ---------  ---------
     Cash and cash equivalents, end of period.........................  $  30,387  $ 169,846  $  16,161
                                                                        =========  =========  =========
Supplemental disclosure:
     Interest paid during the period..................................  $     593  $     261  $   2,987
     Income taxes paid during the period..............................     13,046     76,323     43,264


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

</TABLE>
<PAGE>
                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   Organization and Presentation

     Description of Business and Operations

     EXCEL  Communications,  Inc., previously New RES, Inc., was incorporated in
the state of  Delaware  in May 1997.  EXCEL  Communications,  Inc. is the parent
company of Excelcom, Inc. ("Excelcom"),  previously EXCEL Communications,  Inc.,
which was  incorporated  in the state of Delaware in December  1995.  Excelcom's
predecessor,  EXCEL  Telecommunications,  Inc., was incorporated in the state of
Texas in December 1988. All references to the  ''Company'' or ''EXCEL'' refer to
EXCEL Communications,  Inc. and include its subsidiaries and predecessors. EXCEL
is a provider of a variety of communications products and services which include
residential long distance service,  commercial long distance service, and paging
service.   The  Company's   presubscribed   residential  services  are  marketed
exclusively  through a network  marketing system of independent  representatives
("IRs").  EXCEL markets  residential  dial around products and services  through
Dial & SaveSM,  Long Distance  Wholesale ClubSM and Telco ChoiceSM  programs and
markets its commercial  products and services through IRs and  approximately 311
direct sales personnel,  117 sales management personnel, 275 active dealers and
19 telesales  agents.  The Company  completes  subscriber  calls to all directly
dialable locations worldwide.

     On  October  14,  1997,  EXCEL  Communications,   Inc.,  succeeded  to  the
businesses  of  Excelcom  and Telco  Communications  Group,  Inc.  ("Telco"),  a
facilities-based  provider  of  telecommunications  services,  pursuant  to  the
Agreement and Plan of Merger dated as of June 5, 1997 (the "Merger"). The Merger
creates the fifth  largest long  distance  company in the United States based on
the  number  of  presubscribed  lines,  with pro forma  consolidated  annualized
revenues  of  approximately  $2 billion,  11 billion  annualized  long  distance
minutes of usage, 6.0 million customers, and approximately 100,000 network miles
of DS-3 capacity. The results of operations for the year ended December 31, 1997
include Telco's  financial results after October 14, 1997, the effective date of
the Merger. (See Note 3 - "EXCEL and Telco Merger".)

     The Company leases  transmission  lines from a variety of  facilities-based
and resale long distance carriers.  The Company's  contracts with these entities
typically have terms ranging from 12 to 60 months.  The Company  supplements its
leased  "on-network"  capacity with "off-net"  services from a variety of resale
and facilities-based long distance carriers.  In addition,  the Company does not
have any on-network  international  network arrangements and exclusively resells
the network capacity of other resale and facilities-based long distance carriers
to international destinations.

     The Company currently has agreements with Frontier Communications Services,
Inc.  ("Frontier"),   IXC  Long  Distance,  Inc.  ("IXC  Long  Distance"),   MCI
Telecommunications  Corp. ("MCI"),  and WorldCom,  Inc.  ("WorldCom") to provide
switching  services and network  transmission of its long distance  subscribers'
traffic.  The agreements with IXC Long Distance,  MCI, and WorldCom each contain
minimum  usage  commitments,  while the agreement  with  Frontier  provides that
Frontier  is to be the  exclusive  carrier for  certain  calling  card calls and
personal 800 service.  The Company is currently meeting all minimum  commitments
under these contracts.

  Marketing Activities

   Marketing  services  revenues  are  primarily  comprised  of  receipts  for
materials and services rendered by EXCEL to IRs and area  coordinators  ("ACs").
Except  in  certain  states,  IRs are  required  to make an  initial  refundable
application  deposit  with EXCEL as an  expression  of  commitment.  There is no
additional  cost to  participate.  IRs have an option  to  purchase  a  start-up
package, which includes a training class and training materials, business forms,
promotional and presentation  materials,  ongoing  technical and  administrative
support services, and monthly reports. If the start-up package is purchased, the
application  deposit  requirement is waived. In addition,  EXCEL offers training
positions whereby ACs, certified by the Company, provide training to new IRs.

<PAGE>

                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)



     Selling, general and administrative expenses consist of marketing costs and
the costs of providing  teleservices and other support services for subscribers,
billing and collecting long distance and paging  revenues,  and the costs of the
information systems and personnel required to support the Company's  operations.
Marketing costs include commissions paid to IRs and sales  representatives,  the
costs of  providing  training,  business  forms,  promotional  and  presentation
materials, technical and administrative support services, and monthly reports to
IRs,  salaries and  commissions  paid to the Commercial  Sales Division  ("CSD")
sales representatives, and direct mail advertising expenses. Commissions paid to
IRs are based upon the  acquisition of new long distance and paging  subscribers
("subscriber acquisition costs") and long distance telephone and paging usage by
subscribers.  The  Company  also pays  commissions  for the  training of IRs and
certain  ACs.  Effective  January 1, 1997,  the  Company  changed  its method of
accounting  for  subscriber  acquisition  costs.  Previously,  the  Company  had
deferred the portions of  commissions  paid to IRs that  directly  relate to the
acquisition of long distance and paging subscribers.  Beginning January 1, 1997,
the Company began fully  expensing  subscriber  acquisition  costs in the period
incurred in order to present its operating  results in a manner more  consistent
with  other  telecommunications  companies  against  which its  results  are now
compared.  The Company  recognized a one-time  charge of $65.2  million,  net of
income  taxes,  ($0.56  per share) in the first  quarter of 1997 to reflect  the
change in accounting  principle.  On a pro forma basis, the Company's net income
would have been $121.8  million  ($1.14 per share) and $12.4 million  ($0.13 per
share) for the years ended  December  31, 1996 and 1995,  respectively,  if this
accounting change had been retroactively applied.

     Costs  incurred in connection  with direct mail  advertising  and marketing
commercial  long  distance  products are  recognized as expense in the period in
which they are incurred.

2.  Summary of Significant Accounting Policies

    Cash and Cash Equivalents

     The  Company   considers  all  highly  liquid   investments  with  original
maturities of three months or less to be cash equivalents.

    Accounts Receivable

     Accounts  receivable  are  net  of  allowance  for  doubtful  accounts  and
anticipated  revenue adjustments of approximately $9.0 million and $23.1 million
as of December  31, 1996 and 1997,  respectively.  The  Company  establishes  an
allowance for doubtful accounts and anticipated  revenue  adjustments based upon
factors surrounding the credit risk of specific subscribers,  historical trends,
and other  information.  During 1997,  the Company  recorded bad debt expense of
approximately 3% of communication  services revenues based on current trends and
information.

    Long Distance Revenue Recognition

     Revenue is recorded when service is rendered, which is measured when a long
distance  call is  completed  and is recorded  net of an  allowance  for certain
revenues  which the Company  estimates  will  ultimately  be refunded,  rebated,
uncollectible or unbillable.

    Concentrations of Credit Risk

     The Company's subscribers are primarily residential subscribers and are not
concentrated in any specific geographic region of the United States. The Company
has agreements with local exchange  carriers  (''LECs''),  which provide billing
and  collection  services to the majority of the  Company's  subscribers.  As of
December  31,  1996 and 1997,  approximately  92% and 70%  respectively,  of the
Company's accounts receivable were due from LECs.

<PAGE>

                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)



   Inventories

     Inventory  consists  primarily  of pagers  held for resale and sales  aids,
which include  marketing  materials and  promotional  items and is valued at the
lower of cost (determined on a first-in, first-out basis) or market.

   Property and Equipment

     Property and equipment,  including  items financed  through capital leases,
are  stated at cost and  depreciated  using the  straight-line  method  over the
estimated useful lives of the assets, as follows:

                                              Estimated
            Asset Classification             Useful Life
            ---------------------            -----------

            Buildings.......................   30 years
            Furniture and equipment.........   3-5 years
            Information systems software....   5 years
            Information systems hardware....   5 years
            Network equipment...............   5-35 years
            Leasehold improvements..........   Life of lease



   Long-Lived Assets, Identifiable Intangibles and Goodwill

     The Company has recorded goodwill and certain  identifiable  intangibles in
connection with the Merger. These assets are amortized over periods ranging from
5 to 40 years.  The Company  reviews  long-lived  assets,  certain  identifiable
intangibles,  and goodwill  pertaining to those assets for  impairment  whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the Company
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected cash flows is less than the
carrying amount of the asset,  an impairment  loss is recognized.  No impairment
loss has been recorded in 1995, 1996 or 1997.

   Income Taxes

     The Company  accounts  for income  taxes in  accordance  with SFAS No. 109,
''Accounting for Income Taxes'' which requires that deferred income tax expenses
be provided based upon estimated  future tax effects of differences  between the
carrying amounts of assets and liabilities for financial  reporting purposes and
the amounts used for income tax purposes  calculated  based upon  provisions  of
enacted tax laws.

   Use of Estimates

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

<PAGE>
                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


   Prior Year Reclassification

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

   Stock Based Compensation

     The  Company,  as  permitted  by  the  Statement  of  Financial  Accounting
Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS No. 123"),
has  chosen to  continue  to  account  for stock  based  compensation  using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."  Accordingly,  compensation cost for
stock  options is measured as the excess,  if any, of the quoted market price of
the Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.  The Company has adopted the disclosure  requirements of SFAS
No. 123.

3.  EXCEL and Telco Merger

     On October 14, 1997, New RES, Inc., a Delaware corporation and newly formed
holding company, now EXCEL Communications,  Inc., ("Holdings"), succeeded to the
businesses of Excelcom,  previously EXCEL Communications,  Inc., and Telco, as a
result of mergers of wholly-owned subsidiaries with and into Excelcom and Telco,
pursuant to the  Agreement  and Plan of Merger dated as of June 5, 1997.  At the
closing  of the  Merger on October  14,  1997:  (i)  Excelcom  and Telco  became
wholly-owned  subsidiaries of Holdings;  (ii) each outstanding share of Excelcom
common  stock  converted  into the right to receive one share of common stock of
Holdings;  (iii) each outstanding share of Telco common stock converted into the
right to receive  0.7595  shares of common stock of Holdings and $15.00 in cash;
(iv) except for certain options, each then outstanding and unexercised option to
acquire one share of Telco common  stock was assumed by Holdings  and  converted
into an option to  acquire  1.5190  shares of  Holdings  common  stock,  and the
exercise  price per share with respect to each such assumed  option was adjusted
to equal the exercise  price under the original  option  divided by 1.5190;  (v)
each then  outstanding and  unexercised  option to acquire one share of Excelcom
common stock was assumed by Holdings and converted into an option to acquire one
share of Holdings common stock,  and the exercise price per share was unchanged;
(vi) the name of EXCEL Communications,  Inc. was changed to Excelcom,  Inc.; and
(vii)  the  name  of  Holdings  was  changed  to  EXCEL   Communications,   Inc.
Consideration  for the Merger  consisted  of $666.2  million in cash  (including
$164.5 million of Telco debt assumed and paid by EXCEL) and 25,376,506 shares of
common stock, $.001 par value, of the Company ("Company Common Stock").

     On October 14, 1997,  Holdings made an initial  borrowing of  approximately
$544 million under the New Credit  Facility to fund the cash  purchase  price of
the Merger and related costs and expenses and to refinance existing indebtedness
of  Telco.  The  initial  LIBOR  spread  and  Prime  spread  were  1.0%  and 0%,
respectively. (See Note 5 - "Long-Term Debt and Capital Lease Obligations".)

     The  merger  of Telco  into  Holdings  has been  accounted  for  under  the
"purchase"  method of accounting,  with EXCEL as the acquirer in accordance with
generally accepted accounting principles,  and the merger of EXCEL into Holdings
has been  accounted for as a  reorganization.  The results of operations for the
year ended December 31, 1997 include Telco's financial results after October 14,
1997,  the  effective  date of the  Merger.  In  connection  with  the  purchase
accounting,  EXCEL recorded certain known liabilities  related to costs required
to exit  activities  of Telco and  payments to be made under a  severance  plan.
These  included  exit costs of $36.8  million  and  severance  payments  of $2.8
million.  Management is currently  integrating the two organizations and expects
to complete the process by the end of the second quarter of 1998.

<PAGE>

                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)




     The merger  with Telco  resulted in the  recognition  of goodwill of $906.6
million which is being amortized  straight-line  over a period of 40 years.  The
following  unaudited financial  information  represents the Company's results of
operations on a pro forma basis as if the Merger had occurred on January 1, 1996
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
                                                               Pro Forma
                                                        Years Ended December 31,
                                                      --------------------------
                                                         1996            1997
                                                      -----------    -----------
<S>                                                   <C>            <C>
 Total revenues...................................... $ 1,802,900    $ 1,897,540
                                                      ===========    ===========
 Net income before cumulative effect of change in
    accounting principle (1)......................... $   120,691    $    94,067
                                                      ===========    ===========

 Net income (1)...................................... $   120,691    $    28,853
                                                      ===========    ===========

 Net income per share before cumulative effect of
    change in accounting principle (1)............... $     0.90     $      0.69
                                                      ===========    ===========

 Net income per share (1)............................ $     0.90     $      0.21
                                                      ===========    ===========

     (1)  Excludes non-recurring charges of $64.6 million in 1997. See Note 4 to
          the Consolidated Financial Statements.
</TABLE>

     These pro forma amounts represent the historical operating results of EXCEL
and Telco combined with appropriate adjustments which give effect to incremental
goodwill  amortization  and interest  expense  incurred in  connection  with the
Merger. These pro forma amounts do not give effect to any potential cost savings
or  synergies  that could  result  from the  Merger.  The pro forma data are not
intended to be indicative of actual  results had the Merger  occurred on January
1, 1996 nor do they indicate results which may be achieved in the future.

     In  conjunction  with the Merger on October 14, 1997,  net cash paid was as
follows (dollars in thousands):

     Assets acquired............................       $ 1,332,102
     Liabilities assumed........................          (365,405)
     Common stock issued........................          (465,515)
                                                       -----------
        Cash paid...............................           501,182
     Less cash acquired.........................           (25,616)
                                                       -----------
        Net cash paid...........................       $   475,566
                                                       ===========
<PAGE>

                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


4.  Non-Recurring Charges

     During the fourth quarter of 1997, primarily as a result of the Merger, the
Company  initiated  plans to  reorganize  and  restructure  its  management  and
operational  organization  and  facilities  to eliminate  duplicate  facilities,
abandon certain  projects and activities,  and to take further  advantage of the
synergies available to the combined entities.  Accordingly,  the Company charged
to  operations  the estimated  costs of such  reorganization  and  restructuring
activities in addition to certain legal  expenses,  vendor  disputes,  and other
charges.  These costs amount to $64.6 million and are included in  non-recurring
charges in the Company's Consolidated Statement of Operations.

     The  following  table  reflects the  components  of the  significant  items
included in non-recurring  charges for the year ended December 31, 1997 (amounts
in thousands):

                                                                Year Ended
                                                             December 31, 1997
                                                            -------------------

  Reduction in carrying value of certain assets..........        $ 47,678
  Costs to exit unfavorable contracts....................           5,559
  Legal expenses, vendor disputes and other charges......          11,400
                                                                 --------
       Non-recurring charges.............................        $ 64,637
                                                                 ========

5.   Long-Term Debt and Capital Lease Obligations

     Long-term debt and capital lease obligations  consisted of the following at
December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
                                               December 31,
                                        -------------------------
                                            1996         1997
                                        -----------  ------------
<S>                                     <C>          <C>
  Capital lease obligations.............   $ 339      $   2,968
  Revolving credit facility.............      --        475,000
  Less current maturities...............    (239)          (676)
                                           -----      ---------
                                           $ 100      $ 477,292
                                           =====      =========
</TABLE>
     On October  10,  1997,  Holdings  entered  into a new credit  facility  for
borrowings up to $1 billion (the "New Credit  Facility").  Borrowings  under the
New Credit  Facility are  available  for general  corporate  purposes  including
acquisitions and are subject to various financial  covenants.  The interest rate
on the New  Credit  Facility  is based on  Holdings'  prevailing  debt ratio and
ranges on a Eurodollar (LIBOR) option from a spread of 0.625% to 1.75%, and on a
Base  (Prime)  Rate  option  from  a  spread  of 0% to  0.50%.  Total  borrowing
availability  under the New Credit Facility reduces to $800 million on September
30, 2000, and to $500 million on September 30, 2001, and the New Credit Facility
expires on September 30, 2002.

     On October 14, 1997,  Holdings made an initial  borrowing of  approximately
$544 million under the New Credit  Facility to fund the cash  purchase  price of
the Merger and related costs and expenses and to refinance existing indebtedness
of  Telco.  The  initial  LIBOR  spread  and  Prime  spread  were  1.0%  and 0%,
respectively.

<PAGE>

                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


6.   Property and Equipment

     Property and equipment  consisted of the following at December 31, 1996 and
1997 (in thousands):
<TABLE>
<CAPTION>
                                                             December 31,
                                                        ---------------------
                                                           1996         1997
                                                        --------    ---------
     <S>                                               <C>          <C>
     Land.............................................  $  5,067    $   5,067
     Buildings........................................    16,506       18,465
     Furniture and equipment..........................    28,074       42,781
     Information systems software.....................    17,585       11,977
     Information systems hardware.....................    15,480       19,815
     Leasehold improvements...........................     2,871        8,491
     Network equipment................................        --      185,423
     Network facilities under development.............        --       25,195
                                                        --------    ---------
        Total.........................................    85,583      317,214
     Less-Accumulated depreciation and amortization...    (8,671)     (35,367)
                                                        --------    ---------
     Net property and equipment.......................  $ 76,912    $ 281,847
                                                        ========    =========
</TABLE>

7.   Income Taxes

     The  components  of the  provision  for income taxes are as follows for the
years ended December 31, 1995, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                           ------------------------------------
                                             1995           1996        1997
                                           ---------     ---------    ---------
<S>                                        <C>           <C>          <C>
  Current income tax expense:
     Federal.........................      $  13,322     $  56,731    $  54,106
     State...........................            812         3,621        6,618
                                           ---------     ---------    ---------
                                           $  14,134     $  60,352    $  60,724
                                           ---------     ---------    ---------
  Deferred income tax expense:
     Federal.........................      $  12,110     $  23,650    $  (4,606)
     State...........................            649         1,486         (457)
                                           ---------     ---------    ---------
                                           $  12,759     $  25,136    $  (5,063)
                                           ---------     ---------    ---------

  Provision for income taxes.........      $  26,893     $  85,488    $  55,661
                                           =========     =========    =========
</TABLE>
<PAGE>

                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


     Temporary  differences  which  give  rise to the net  deferred  income  tax
(liability) asset at December 31, 1996 and 1997 are as follows (in thousands):

                                                             December 31,
                                                        ----------------------
                                                          1996          1997
                                                        --------     ---------
Deferred income tax assets:
   Accounts receivable................................. $  1,558     $      --
   Inventory...........................................       --           205
   Deferred management services fees...................       --         5,314
   Accrued liabilities.................................       --        44,948
   Other...............................................      624         2,695
                                                        --------     ---------
                                                           2,182        53,162
Deferred income tax liabilities:
   Accounts receivable.................................       --        (2,729)
   Depreciation........................................   (4,193)       (2,249)
   Deferred subscriber acquisition costs ..............  (38,144)           --
   Other...............................................   (1,847)      (10,372)
                                                        --------     ---------
                                                         (44,184)      (15,350)
                                                        --------     ---------
Net deferred tax (liability) asset.....................  (42,002)       37,812
Less-Net current deferred income tax asset.............   (1,897)      (34,128)
                                                        --------     ---------
Net long-term deferred income tax (liability) asset.... $(43,899)    $   3,684
                                                        ========     =========

     The  recognition  of the deferred tax asset related to deferred  management
service fees reflects the cumulative effect of a change in accounting method for
income tax purposes for management  service fees.  The cumulative  effect of the
change from the cash method to the  accrual  method is being taken into  account
over six years beginning in 1996 for income tax return purposes.

     The provision for income taxes was different than the amount computed using
the statutory  income tax rate for the reasons set forth in the following  table
(in thousands):

                                                  Years Ended December 31,
                                               -------------------------------
                                                 1995       1996        1997
                                               --------   --------    --------
          Tax computed at statutory rate.....  $ 24,969   $ 80,470    $ 50,255
          State income taxes and other.......     1,924      5,018       5,406
                                               --------   --------    --------
             Provision for income taxes......  $ 26,893   $ 85,488    $ 55,661
                                               ========   ========    ========

<PAGE>

                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


8.   Earnings Per Share

     The Company has adopted  Statement of Financial  Accounting  Standards  No.
128,  "Earnings per Share" ("SFAS No. 128"),  effective  December 15, 1997. SFAS
No. 128 requires the  calculation of basic  earnings per common share,  which is
computed  by dividing  net income by the  weighted  average  number of shares of
common  stock  outstanding  during the period,  and diluted  earnings per common
share,  which is computed using the weighted  average number of shares of common
stock and common  stock  equivalents.  Basic  earnings per share are computed as
follows:
<TABLE>
<CAPTION>

                                                       Years Ended December 31,
                                                     ---------------------------
                                                       1995      1996     1997
                                                     --------  -------- --------
<S>                                                  <C>       <C>      <C>
Basic:
Net income...........................................$ 44,446  $144,427 $ 22,712
Weighted average shares of common stock outstanding..  99,000   105,346  113,376
Unallocated employee stock plan shares...............  (2,040)     (540)      --
                                                     --------  -------- --------
Adjusted weighted average shares of common stock
   outstanding.......................................  96,960   104,806  113,376
                                                     --------  -------- --------
Basic earnings per share.............................$   0.46   $  1.38  $  0.20
                                                     ========  ======== ========
</TABLE>

     Diluted  earnings  per  share is based on the  weighted  average  number of
shares of common stock  outstanding.  The weighted  average  shares  outstanding
include common stock equivalents which represent the effect,  using the treasury
stock method, of options granted under the Company's stock option plan.  Diluted
earnings per share are computed as follows:
<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                     ---------------------------
                                                      1995      1996      1997
                                                     ------- ---------  --------
<S>                                                  <C>     <C>        <C>
Diluted:
Net income...........................................$44,446 $ 144,427  $ 22,712
Adjustment of shares outstanding:
Weighted average shares of common stock outstanding.. 99,000   105,346   113,376
Unallocated employee stock plan shares............... (2,040)     (540)       --
                                                     ------- ---------  --------
Adjusted weighted average shares of common stock
   outstanding....................................... 96,960   104,806   113,376
Shares of common stock issuable upon the assumed
   exercise of stock options.........................    361     2,441     2,171
                                                     ------- ---------  --------
Adjusted shares of common stock and common stock
    equivalents for computation...................... 97,321   107,247   115,547
                                                     ------- ---------  --------
Diluted earnings per share...........................$  0.46 $    1.35  $   0.20
                                                     ======= =========  ========
</TABLE>

     In 1995 and 1996, the weighted average shares outstanding excluded employee
stock  ownership  plan shares that had not been released to employees at the end
of the period.

9.   Stockholders' Equity

     Effective  January 1, 1996,  the Company  issued  99,000,000  shares of its
common  stock to  stockholders  at a  conversion  rate of 1,000  shares of newly
issued common stock for each share of common stock  previously  held.  These new
shares were  issued  pursuant to a  reorganization,  which  included a statutory
merger  whereby  the  Company  was  formed as a holding  company.  In  addition,
500,000,000  shares were  authorized.  All common stock and per share amounts in
the Company's Consolidated Financial Statements have been adjusted retroactively
to give effect to the stock conversion and the change in authorized  shares.  In
May 1996,  the Company sold  9,800,000  shares of its common stock at $15.00 per
share,  which resulted in  108,800,000  shares  outstanding  and net proceeds of
approximately  $133.9 million to the Company after deducting the expenses of the
offering. In connection with the Merger, the company issued 25,376,506 shares of
common stock, $.001 par value, to Telco stockholders.

<PAGE>

                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


     The Company also has 10,000,000 shares of preferred stock authorized, which
can be issued in one or more series with fixed  designations,  relative  powers,
preferences, rights, qualifications, limitations, and restrictions of all shares
of each series, including without limitation, dividend rates, preemptive rights,
conversion  rights,  voting  rights,  redemption  and sinking  fund  provisions,
liquidation preferences, and the number of shares constituting each such series,
without any further vote or action by the stockholders.

     In  June  1997,  the  Company's  Board  of  Directors  approved  a plan  to
repurchase  up to  10,000,000  shares of its common  stock in the open market or
through  privately  negotiated  transactions.  This  plan  was  terminated  upon
effectiveness  of the Merger and the  treasury  stock was  retired.  Repurchases
under this plan totaled 2,752,672 shares at a cost of $55.7 million. In December
1997, the Company's  Board of Directors  approved a new plan to repurchase up to
10,000,000  shares of its common  stock in the open market or through  privately
negotiated transactions.  Repurchases under this plan totaled 65,800 shares at a
cost of approximately $970,000 through December 31, 1997.

10.   Commitments and Contingencies

     The  Company  leases  certain  office  equipment  and  office  space  under
operating leases.  Total expense for the years ended December 31, 1995, 1996 and
1997  was  approximately  $1.1  million,   $6.6  million,   and  $11.1  million,
respectively.

     Future minimum rents due under  operating  leases with initial or remaining
terms  greater  than 12  months  as of  December  31,  1997 are as  follows  (in
thousands):

            1998.........................  $ 14,362
            1999.........................    12,216
            2000.........................    11,683
            2001.........................     9,518
            2002.........................     6,665
            Thereafter...................     6,981

Litigation, Claims and Assessments

     On August 30, 1996, AT&T filed suit in the United States District Court for
the  District  of  Delaware   against  the  Company,   its   subsidiary,   EXCEL
Communications Marketing, Inc., and EXCEL Telecommunications, Inc. alleging past
and continued  infringement of a single patent without  specifying the amount of
damages. The Court granted summary judgment in favor of Excel on March 27, 1998.
The Court held that the claims being  asserted  against Excel were  unpatentable
under U.S. patent laws. The Company expects AT&T to appeal this decision.

Legislative and Regulatory Matters

     On February 8, 1996, the 1996  Telecommunications Act was enacted into law.
This  comprehensive   federal  legislation  will  affect  every  sector  of  the
telecommunications  industry.  Included in the new  statutory  provisions is the
opening up of local telephone markets to competition from  facilities-based  and
resale  carriers and,  subject to certain  preconditions  and safeguards for the
BOCs, the elimination of restrictions on Bell Operating  Company ("BOC") and GTE
Operating  Company ("GTOC")  entrance into the long distance  telecommunications
market.  The FCC  adopted  rules to  govern  the  introduction  of new  forms of
competition in its August 8, 1996 Interconnection Orders, significant aspects of
which,  including  provisions  governing the wholesale pricing of local service,
were  overturned by the U.S. Eighth Circuit Court of Appeals.  The U.S.  Supreme
Court has agreed to hear appeals of this decision, but it is not expected by the
Company to render a final decision until early 1999. Therefore, it is unknown at
this time whether this Eighth Circuit decision will be upheld or what impact the
1996  Telecommunications  Act or the  Interconnection  Orders  will  have on the
Company.  Depending on the nature and timing of BOC and GTOC entry into the long
distance market, the Company may face significant  additional competition in the
provision of long distance services.  However, the 1996  Telecommunications  Act
opens the local telephone market to competition,  which, depending on the nature
of such opening,  the Company  believes may provide  opportunities to compete in
the provision of local services.  The Company is currently seeking certification
to provide resold local exchange  services in several states. As of December 31,
1997, the Company is authorized to provide resold local exchange  services in 31
states.
<PAGE>
                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


     Various  governmental  agencies monitor direct selling activities,  and the
Company has  occasionally  been  requested to supply  information  regarding its
marketing plan to certain of such agencies.  Although the Company  believes that
its  network  marketing  system  is in  substantial  compliance  with  laws  and
regulations  of each state relating to direct  selling  activities,  there is no
assurance that legislation and regulations  adopted in particular  jurisdictions
in the future will not adversely affect the Company's operations.

11.   Employee Benefit Plans

     The  Company  and  its  subsidiaries  offer  its  qualified  employees  the
opportunity to participate in one of its defined  contribution  retirement plans
qualifying under the provisions of Section 401 (k) of the Internal Revenue Code.
Generally  each  employee may  contribute  on a tax deferred  basis up to 15% of
their gross salary into the plan. The Company's contribution is to be determined
annually by the Board of Directors.  Company  contributions  to the plan for the
years ended December 31, 1995, 1996, and 1997 were not significant.

     Effective  January  1,  1995,  the  Company  amended  the  401(k)  plan  to
incorporate an Employee  Stock  Ownership  Plan ("ESOP") for  substantially  all
employees of EXCEL. On November 1, 1995, the ESOP borrowed $6.0 million from the
Company to purchase  3,000,000 shares of common stock. The shares were held in a
trust and were  allocated  to  employees'  accounts  in the ESOP during the same
calendar  year in which  debt  repayments  were  made.  The  Company  recognized
compensation  expense  related to the ESOP of $5.6  million and $6.3 million for
the years ended December 31, 1995 and 1996, respectively. During 1995, 1,707,000
shares were released and allocated to ESOP participants. The remaining 1,293,000
shares were allocated to ESOP participants in 1996.

     The Company has various  stock  option  plans which  permit the issuance of
either incentive stock options or non-statutory  options to selected  employees,
directors, and consultants to the Company and its affiliates.  The plan reserves
4,400,000  shares of common stock for grant.  These options vest over a three to
six year period and expire ten years from the date of grant.  As of December 31,
1997,  3,270,000  shares remain available for future option grants and 2,279,731
outstanding options are vested or exercisable.

     As permitted by SFAS No. 123, the Company has chosen to continue to account
for stock based  compensation using the intrinsic value method prescribed in APB
Opinion No. 25.  Accordingly,  no compensation  cost has been recognized for the
Company's  stock option plans.  Had  compensation  cost for the Company's  stock
based compensation plans been determined using the alternative accounting method
based on the fair value  prescribed by SFAS No. 123, the Company's pro forma net
income for the year ended  December  31, 1997 would have been $22.1  million and
diluted  and  basic  earnings  per  share  would  have  been  $0.19  and  $0.20,
respectively,  for the same period. The reduction in the Company's 1996 and 1995
net income and earnings per share would have been insignificant.

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option pricing model. The weighted average fair value of the
options  granted  under  this  model  was $7.75 per  option  for the year  ended
December 31, 1997 based on the  following  assumptions:  no expected  dividends,
risk free interest rate of 6.39%,  expected life of six years,  and the expected
volatility of 28.96%.
<PAGE>

                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)



     A summary of stock option  activity for the three years ended  December 31,
1997 is as follows:
                                                             Weighted Average
                                                  Number of   Exercise Price
                                                   Options      per Share
                                                 ----------      -------

          Outstanding, December 31, 1994.......          --         N/A
             Granted...........................   4,893,075      $ 4.50
             Exercised.........................          --         N/A
             Canceled..........................          --         N/A
                                                 ----------
          Outstanding, December 31, 1995.......   4,893,075      $ 4.50
             Granted...........................     332,750      $15.33
             Exercised.........................          --         N/A
             Canceled..........................    (133,850)     $ 5.33
                                                 ----------
          Outstanding, December 31, 1996.......   5,091,975      $ 5.19
             Granted...........................   1,946,070      $19.97
             Granted in connection with the
               merger..........................   4,911,606      $ 9.27
             Exercised.........................  (1,255,909)     $ 4.18
             Canceled..........................    (646,290)     $ 7.72
                                                 ----------
          Outstanding, December 31, 1997.......  10,047,452      $10.08
                                                 ==========


     The  following  table  summarizes  information  about fixed  stock  options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
                Options Outstanding                                Options Exercisable
----------------------------------------------------------    -----------------------------
                               Weighted        Weighted                        Weighted
  Exercise        Number        Average         Average          Number         Average
Price Ranges    Outstanding Remaining Life  Exercise Price    Exercisable    Exercise Price
-------------   ----------- --------------  --------------    -----------       -------
<S>             <C>         <C>             <C>               <C>            <C>
$   0.44-4.96     5,335,083       7.8          $  4.19         1,933,443        $  3.57
$  9.22-10.95       941,926       8.6          $  9.73           222,946        $  9.32
$ 11.03-15.00     1,509,792       9.1          $ 13.18           115,875        $ 11.73
$ 17.94-24.00     2,260,651       9.6          $ 22.04             7,467        $ 21.25
                 ----------                                    ---------
$  0.44-24.00    10,047,452       8.5          $ 10.08         2,279,731        $  4.60
                 ==========                                    =========
</TABLE>
<PAGE>

                  EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)



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

          None.

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant

     The  information  required  by Item 10  appears in and is  incorporated  by
reference  herein from the Company's Proxy Statement for its 1998 Annual Meeting
of Stockholders (the ''Proxy Statement'').


Item 11.   Executive Compensation

     The  information  required  by Item 11  appears in and is  incorporated  by
reference herein from the Company's Proxy Statement.


Item 12.   Security Ownership of Certain Beneficial Owners and Management

     The  information  required  by Item 12  appears in and is  incorporated  by
reference herein from the Company's Proxy Statement.


Item 13.   Certain Relationships and Related Transactions

     The  information  required  by Item 13  appears in and is  incorporated  by
reference herein from the Company's Proxy Statement.



                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

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

     (1)  The  consolidated  financial  statements  of EXCEL  and  supplementary
          financial  information  filed as part of this  report are  included in
          Part II, Item 8. of this Annual Report on Form 10-K.

     (2)  All Financial  Statement  Schedules other than those listed below have
          been omitted  because they are not required under the  instructions to
          the applicable  accounting  regulations of the Securities and Exchange
          Commission or the  information  to be set forth therein is included in
          the  financial  statements  or in the  notes  thereto.  The  following
          additional  financial  data  should  be read in  conjunction  with the
          financial  statements  included  in Part  II,  Item 8. of this  Annual
          Report on Form 10-K:

          Report of Independent Public Accountants on Financial Schedule

          Schedule II-Valuation and Qualifying Accounts

     (3)  Exhibits

     The exhibits filed or  incorporated by reference as part of this report are
     set forth in the Index of  Exhibits  on page E-1 of this  Annual  Report on
     Form 10-K.

(b) Reports on Form 8-K

     (1)  Current  report on Form 8-K dated  October  14,  1997,  regarding  the
          completion of the acquisition of Telco Communications Group, Inc.

     (2)  Current  report on Form 8-K dated  October  24,  1997,  regarding  the
          settlement of the Wood Litigation.

     (3)  Current  report on Form 8-K dated  December  17, 1997,  regarding  the
          resignation of Donald A. Burns and Henry G. Luken,  III from the board
          of directors.

(c) Exhibits

    Refer to Item 14(a)(3) above.


<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

                                         EXCEL Communications, Inc.

                                           /s/ Kenny A. Troutt
                                        By:----------------------------
                                           Kenny A. Troutt
                                           Chief Executive Officer
                                           Date: March 27, 1998

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been  signed  below by the  following  persons  on March 27,  1998 on
behalf of the registrant and in the capacities indicated.

/s/    Kenny A. Troutt
------------------------------------
Kenny A. Troutt
Chief Executive Officer, Chairman of
  the Board and Director
(Principal Executive Officer)


/s/   John J. McLaine
------------------------------------
John J. McLaine
President, Chief Operating Officer,
and Director


/s/   Nicholas A. Merrick
------------------------------------
Nicholas A. Merrick
Executive Vice President
 and Chief Financial Officer
(Principal Financial Officer)
(from October 15, 1997 - present)


/s/   Craig E. Holmes
------------------------------------
Craig E. Holmes
Vice President and
 Chief Accounting Officer
(Principal Accounting Officer)


/s/   Stephen R. Smith
------------------------------------
Stephen R. Smith
Executive Vice President
  of Marketing-Emeritus and Director


/s/   Ronald A. McDougall
------------------------------------
Ronald A. McDougall
Director


/s/   T. Allan McArtor
------------------------------------
T. Allan McArtor
Director
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders and Board of Directors
of EXCEL Communications, Inc.:

     We have audited in accordance with generally  accepted auditing  standards,
the consolidated financial statements of EXCEL Communications,  Inc. (a Delaware
corporation) and subsidiaries (the  ''Company'')  included in this Form 10-K and
have issued our report  thereon dated  January 26, 1998.  Our audit was made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole.  Schedule II,  which is the  responsibility  of the  Company's
management,  is  presented  for purposes of complying  with the  Securities  and
Exchange Commission's rules and is not part of the basic consolidated  financial
statements.  This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
fairly  states in all material  respects the  financial  data required to be set
forth therein in relation to the basic consolidated  financial  statements taken
as a whole.


Dallas, Texas
January 26, 1998                                             ARTHUR ANDERSEN LLP

<PAGE>
<TABLE>
<CAPTION>

                   EXCEL COMMUNICATIONS, INC. AND SUBSIDIARIES

                  SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)


                                             Balance at    Charged to                    Balance at
                                              Beginning    Costs and                       End of
                    Description               of Period     Expenses    Deductions(a)      Period
--------------------------------------------  ---------    ----------   ------------     ----------

Allowance for doubtful accounts and revenue
   adjustments:
<S>                                           <C>          <C>          <C>             <C>
     December 31, 1995.......................     1,700        13,871        9,690          5,881
     December 31, 1996.......................     5,881        38,798       35,728          8,951
     December 31, 1997.......................     8,951        70,360       56,183         23,128


     (a)  Represents  amount  written off as  uncollectible  and  recoveries  of
          previously reserved amounts.

</TABLE>
<PAGE>

                               INDEX TO EXHIBITS
                                  (ITEM 14(a))

  Exhibit
    No.                          DESCRIPTION
  -------                        -----------

     2.1  Agreement  and Plan of Merger,  dated June 5, 1997, by and among EXCEL
          Communications,  Inc., New RES, Inc.,  T-Sub,  Inc.,  E-Sub,  Inc. and
          Telco  Communications  Group,  Inc. The schedules to the Agreement and
          Plan of Merger and the appendices thereto have been omitted.  Holdings
          will furnish  supplementally to the Commission any of the schedules or
          appendices upon request  (incorporated  by reference to Exhibit 2.1 to
          the Company's Registration Statement on Form S-4, as amended, File No.
          333-35377)

     3.1  Certificate of  Incorporation of the Company  (incorporated  herein by
          reference  to Exhibit 3.1 to the  Company's  Quarterly  Report on Form
          10-Q  for  the  quarter  ended  September  30,  1997  filed  with  the
          Commission).

     3.2  Amended and Restated Bylaws of the Company  (incorporated by reference
          to Exhibit 3.2 to the Company's  Quarterly Report on Form 10-Q for the
          quarter ended September 30, 1997 filed with the Commission).

     4.1  Specimen Certificate for Common Stock of the Company  (incorporated by
          reference  to Exhibit 4.1 to the  Company's  Quarterly  Report on Form
          10-Q  for  the  quarter  ended  September  30,  1997  filed  with  the
          Commission).

    10.1  Excelcom,  Inc. 1995 Stock Option Plan  (incorporated  by reference to
          Exhibit 4.4. to Excelcom Inc.'s ("Excelcom") Registration Statement on
          Form S-8, as amended, File No. 333-20061).

    10.2  Excelcom,  Inc.  1997  Director  Stock  Option Plan  (incorporated  by
          reference to Exhibit 4.5 to Excelcom's  Registration Statement on Form
          S-8, as amended, File No. 333-20061).

    10.3  Excelcom,   Inc.  Director  Stock  Option  Agreement  with  Ronald  A.
          McDougall  (incorporated  by  reference  to Exhibit 4.6 to  Excelcom's
          Registration Statement on Form S-8, as amended, File No. 333-20061).

    10.4  Telco  Communications  Group,  Inc.  Amended and  Restated  1994 Stock
          Option  Plan  (incorporated  by  reference  to Exhibit  10.22 to Telco
          Communications Group Inc.'s ("Telco")  Registration  Statement on Form
          S-1, as amended, File No. 333-05857).

    10.5  EXCEL  Communications,  Inc. 1997 Stock Option Plan  (incorporated  by
          reference to Exhibit 4.4 to the  Company's  Registration  Statement on
          Form S-8, File No. 333-38149).

    10.6  EXCEL   Communications,   Inc.   1997   Director   Stock  Option  Plan
          (incorporated   by   reference   to  Exhibit  4.5  to  the   Company's
          Registration Statement on Form S-8, File No. 333-38149).

    10.7  EXCEL Telecommunications, Inc. Employee Ownership Plan Trust Agreement
          dated  October  1,  1995  (the  ''Trust   Agreement'')  between  EXCEL
          Telecommunications,  Inc. and Bank One Texas,  N.A.  (''Bank One'') as
          Trustee of the EXCEL Telecommunications,  Inc. Employee Ownership Plan
          (incorporated by reference to Exhibit 10.3 to Excelcom's  Registration
          Statement on Form S-1, as amended, File No. 333-1076).

    10.8  Amendment  to the Trust  Agreement  dated  December 29, 1995 among the
          Registrant, EXCEL Telecommunications, Inc., and Bank One (incorporated
          by reference to Exhibit 10.4 to Excelcom's  Registration  Statement on
          Form S-1, as amended, File No. 333-1076).

<PAGE>

  Exhibit
    No.                          DESCRIPTION
  -------                        -----------

    10.9  ESOP Loan  Agreement  dated as of October 1, 1995 by and between EXCEL
          Telecommunications,  Inc. and Bank One  (incorporated  by reference to
          Exhibit  10.5 to  Excelcom's  Registration  Statement  on Form S-1, as
          amended, File No. 333-1076).

    10.10 Non-Recourse  Promissory  Note dated  October 1, 1995 payable to EXCEL
          Telecommunications,  Inc. by Bank One in the original principal amount
          of $6,000,000 (incorporated by reference to Exhibit 10.6 to Excelcom's
          Registration Statement on Form S-1, as amended, File No. 333-1076).

    10.11 ESOP  Pledge  Agreement  dated  October 1, 1995 by and  between  EXCEL
          Telecommunications,  Inc. and Bank One  (incorporated  by reference to
          Exhibit  10.7 to  Excelcom's  Registration  Statement  on Form S-1, as
          amended, File No. 333-1076).

    10.12 Stock  Purchase  Agreement  dated as of October  1, 1995  among  EXCEL
          Telecommunications,  Inc.,  Bank One,  Kenny A. Troutt,  and Thomas P.
          Wittmann  (incorporated  by reference  to Exhibit  10.8 to  Excelcom's
          Registration Statement on Form S-1, as amended, File No. 333-1076).

    10.13 Second Amended and Restated  Service  Agreement dated as of January 1,
          1996 by and between Switched Services Communications, L.L.C. (''SSC'')
          and EXCEL  Telecommunications,  Inc.  (incorporated  by  reference  to
          Exhibit  10.9 to  Excelcom's  Registration  Statement  on Form S-1, as
          amended, File No. 333-1076)##.

    10.14 Purchase and Sale  Agreement  dated as of January 1, 1996 by and among
          EXCEL  Telecommunications,  Inc., the  Registrant,  IXC Long Distance,
          Inc., SSC, and IXC Carrier, Inc. (incorporated by reference to Exhibit
          10.10 to  Excelcom's  Registration  Statement on Form S-1, as amended,
          File No. 333-1076).

    10.15 Pledge  Agreement  dated  January 1, 1996  between IXC Long  Distance,
          Inc. and the Registrant (incorporated by reference to Exhibit 10.11 to
          Excelcom's  Registration  Statement on Form S-1, as amended,  File No.
          333-1076).

    10.16 Promissory  Note dated  January 1, 1996 payable to the  Registrant  by
          IXC Long Distance, Inc. in the original principal amount of $6,247,500
          (incorporated by reference to Exhibit 10.12 to Excelcom's Registration
          Statement on Form S-1, as amended, File No. 333-1076).

    10.17 EXCEL  Reseller  Services  Agreement  dated  February 20, 1995 between
          Allnet   Communication   Services,   Inc.   (''Allnet'')   and   EXCEL
          Telecommunications,  Inc.  (incorporated by reference to Exhibit 10.13
          to Excelcom's Registration Statement on Form S-1, as amended, File No.
          333-1076)##.

    10.18 Amendment No. 1 to EXCEL  Reseller  Services  Agreement  dated October
          31,   1995   between   Allnet  and  EXCEL   Telecommunications,   Inc.
          (incorporated by reference to Exhibit 10.14 to Excelcom's Registration
          Statement on Form S-1, as amended, File No. 333-1076)##.

    10.19 Addendum  for  Dedicated  Services  to  the  EXCEL  Reseller  Services
          Agreement   between   Allnet   and  EXCEL   Telecommunications,   Inc.
          (incorporated by reference to Exhibit 10.15 to Excelcom's Registration
          Statement on Form S-1, as amended, File No. 333-1076)##.

    10.20 Agreement  dated May 1, 1989 between  EXCEL  Telecommunications,  Inc.
          and Stephen R. Smith  (incorporated  by reference to Exhibit  10.16 to
          Excelcom's  Registration  Statement on Form S-1, as amended,  File No.
          333-1076).

<PAGE>

  Exhibit
    No.                          DESCRIPTION
  -------                        -----------

    10.21 First  Amendment of  Agreement  dated  January 8, 1996  between  EXCEL
          Telecommunications,   Inc.  and  Stephen  R.  Smith  (incorporated  by
          reference to Exhibit  10.17 to  Excelcom's  Registration  Statement on
          Form S-1, as amended, File No. 333-1076).

    10.22 Commercial  Property  Contract of Sale dated August 8, 1995 between FM
          Properties  Operating  Co.  and  EXCEL  Telecommunications,  Inc.,  as
          amended  (incorporated  by  reference to Exhibit  10.18 to  Excelcom's
          Registration Statement on Form S-1, as amended, File No. 333-1076).

    10.23 Standard  Form of  Agreement  between  Owner and  Contractor/Developer
          dated November 17, 1995,  between EXCEL  Telecommunications,  Inc. and
          Wilcox/CMC Addison,  Inc.  (incorporated by reference to Exhibit 10.19
          to Excelcom's Registration Statement on Form S-1, as amended, File No.
          333-1076).

    10.24 Assignment and Assumption of Construction  Contract dated December 28,
          1995   between   EXCEL   Telecommunications,   Inc.   and   Registrant
          (incorporated by reference to Exhibit 10.20 to Excelcom's Registration
          Statement on Form S-1, as amended, File No. 333-1076).

    10.25 Office Lease dated October 3, 1991 between State of California  Public
          Employees'  Retirement  System  and  EXCEL  Telecommunications,   Inc.
          (incorporated by reference to Exhibit 10.21 to Excelcom's Registration
          Statement on Form S-1, as amended, File No. 333-1076).

    10.26 Lease  Amendment  dated May 17, 1994 between  Stewart  Interchange  I,
          Inc.,  as  successor  in  interest  to  State  of  California   Public
          Employees'  Retirement  System  and  EXCEL  Telecommunications,   Inc.
          (incorporated by reference to Exhibit 10.22 to Excelcom's Registration
          Statement on Form S-1, as amended, File No. 333-1076).

    10.27 Promissory    Note   dated   April   20,   1995   payable   to   EXCEL
          Telecommunications,  Inc. by Kenny A. Troutt in the original principal
          amount of  $4,920,000  (incorporated  by reference to Exhibit 10.27 to
          Excelcom's  Registration  Statement on Form S-1, as amended,  File No.
          333-1076).

    10.28 Promissory    Note   dated   April   21,   1995   payable   to   EXCEL
          Telecommunications,  Inc.  by  Thomas  P.  Wittmann  in  the  original
          principal amount of $360,000 (incorporated by reference to Exhibit 10.
          28 to Excelcom's  Registration Statement on Form S-1, as amended, File
          No. 333-1076).

    10.29 Promissory   Note  dated   September   29,   1995   payable  to  EXCEL
          Telecommunications,  Inc. by Kenny A. Troutt in the original principal
          amount of $720,000  (incorporated  by  reference  to Exhibit  10.29 to
          Excelcom's  Registration  Statement on Form S-1, as amended,  File No.
          333-1076).

    10.30 EXCEL  Communications,  Inc.  Employee  Ownership Plan, as amended and
          restated  effective  October 1, 1995  (incorporated  by  reference  to
          Exhibit  10.30 to  Excelcom's  Registration  Statement on Form S-1, as
          amended, File No. 333-1076).

    10.31 Employment  Agreement,  dated January 1, 1996,  between the Registrant
          and Kenny A. Troutt  (incorporated  by reference  to Exhibit  10.31 to
          Excelcom's  Registration  Statement on Form S-1, as amended,  File No.
          333-1076).

    10.32 EXCEL   Telecommunications,   Inc.  1996  Management   Incentive  Plan
          (incorporated by reference to Exhibit 10.32 to Excelcom's Registration
          Statement on Form S-1, as amended, File No. 333-1076).

    10.33 Form of agreement with  independent  representatives  (form represents
          front and back of agreement).

<PAGE>

  Exhibit
    No.                          DESCRIPTION
  -------                        -----------

    10.34 Form of agreement with area  coordinators  (form  represents front and
          back of agreement).

    10.35 Reseller  Agreement,   dated  as  of  March  8,  1996,  between  EXCEL
          Telecommunications,   Inc.  and  Page  Mart,  Inc.   (incorporated  by
          reference to Exhibit 10.1 to Excelcom's  Quarterly Report on Form 10-Q
          for the quarter ended September 30, 1996.).##

    10.36 Preferred  Vendor Status  Agreement dated as of January 1, 1996 by and
          among  EXCEL  Telecommunications,   Inc.,  IXC  Long  Distance,  Inc.,
          Switched  Services  Communications,  L.L.C.,  and  IXC  Carrier,  Inc.
          (incorporated by reference to Exhibit 10.37 to Excelcom's Registration
          Statement on Form S-1, as amended, File No. 333-1076).

    10.37 Office Lease  Agreement  dated  February 1, 1996  between  Connecticut
          General  Life  Insurance  Company and EXCEL  Telecommunications,  Inc.
          (incorporated by reference to Exhibit 10.38 to Excelcom's Registration
          Statement on Form S-1, as amended, File No. 333-1076).

    10.38 Amendment No. 2 to EXCEL Reseller  Services  Agreement dated April 27,
          1996 between Allnet and EXCEL  Telecommunications,  Inc. (incorporated
          by reference to Exhibit 10.39 to Excelcom's  Registration Statement on
          Form S-1, as amended, File No. 333-1076).

    10.39 Telecommunications  Services  Agreement,  dated May 31, 1996,  between
          WorldCom Network  Services,  Inc. d/b/a WilTel  (''WilTel'') and EXCEL
          Telecommunications, Inc. (incorporated by reference to Exhibit 10.1 to
          Excelcom's  Quarterly  Report on Form 10-Q for the quarter  ended June
          30, 1996).

    10.40 Program  Enrollment  Terms,  dated May 31,  1996,  between  WilTel and
          EXCEL  Telecommunications,  Inc. (incorporated by reference to Exhibit
          10.2 to Excelcom's Quarterly Report on Form 10-Q for the quarter ended
          June 30, 1996).##

    10.41 Amended and Restated  Program  Enrollment  Terms,  dated  November 24,
          1997 between WilTel and EXCEL Telecommunications, Inc.#

    10.42 Service  Schedule,  dated  May 31,  1996,  between  WilTel  and  EXCEL
          Telecommunications, Inc. (incorporated by reference to Exhibit 10.3 to
          Excelcom's  Quarterly  Report on Form 10-Q for the quarter  ended June
          30, 1996).##

    10.43 Amendment No. 3 to EXCEL Reseller Services  Agreement,  dated February
          20, 1995 and effective April 1, 1995, between Frontier  Communications
          Services,  Inc. and EXCEL  Telecommunications,  Inc.  (incorporated by
          reference to Exhibit 10.4 to Excelcom's  Quarterly Report on Form 10-Q
          for the quarter ended June 30, 1996).

    10.44 Carrier    Agreement,    dated   June   26,    1996,    between    MCI
          Telecommunications  Corporation  and  EXCEL  Telecommunications,  Inc.
          (incorporated by reference to Exhibit 10.5 to the Company's  Quarterly
          Report on Form 10-Q for the quarter  ended June 30,  1996,  filed with
          the Commission).##

    10.45 Underwriting  Agreement,  dated May 9, 1996,  between  the Company and
          Donaldson, Lufkin & Jenrette Securities Corporation, as representative
          of  the  several  U.S.  underwriters  and  the  several  international
          managers for the Company's  initial public offering  (incorporated  by
          reference to Exhibit 1.1 to Excelcom's  Registration Statement on Form
          S-1, as amended, File No. 333-1076).

<PAGE>

  Exhibit
    No.                          DESCRIPTION
  -------                        -----------

    10.46 Form of  Employment  Agreement  between  Donald  A.  Burns  and  Telco
          (incorporated   by  reference   to  Exhibit  10.1  to  the   Company's
          Registration Statement on Form S-4, as amended, File No. 333-35377).

    10.47 Form of  Employment  Agreement  between  Stephen  G.  Canton and Telco
          (incorporated   by  reference   to  Exhibit  10.2  to  the   Company's
          Registration Statement on Form S-4, as amended, File No. 333-35377).

    10.48 Form of Employment  Agreement  between  Henry G. Luken,  III and EXCEL
          (incorporated   by  reference   to  Exhibit  10.3  to  the   Company's
          Registration Statement on Form S-4, as amended, File No. 333-35377).

    10.49 Form of  Employment  Agreement  between  Nicholas A. Merrick and Telco
          (incorporated   by  reference   to  Exhibit  10.4  to  the   Company's
          Registration Statement on Form S-4, as amended, File No. 333-35377).

    10.50 Form of  Employment  Agreement  between  Bryan K.  Rachlin  and  Telco
          (incorporated   by  reference   to  Exhibit  10.5  to  the   Company's
          Registration Statement on Form S-4, as amended, File No. 333-35377).

    10.51 Form of  Non-Competition  Agreement  between Donald A. Burns and EXCEL
          (incorporated   by  reference   to  Exhibit  10.6  to  the   Company's
          Registration Statement on Form S-4, as amended, File No. 333-35377).

    10.52 Form of  Non-Competition  Agreement  between  Stephen  G.  Canton  and
          EXCEL(incorporated  by  reference  to  Exhibit  10.7 to the  Company's
          Registration Statement on Form S-4, as amended, File No. 333-35377).

    10.53 Form of  Non-Competition  Agreement  between  Henry G. Luken,  III and
          EXCEL  (incorporated  by reference  to Exhibit  10.8 to the  Company's
          Registration Statement on Form S-4, as amended, File No. 333-35377).

    10.54 Form of  Non-Competition  Agreement  between  Nicholas A.  Merrick and
          EXCEL  (incorporated  by reference  to Exhibit  10.9 to the  Company's
          Registration Statement on Form S-4, as amended, File No. 333-35377).

    10.55 Form of  Employment  Agreement  between  Bryan K.  Rachlin  and  EXCEL
          (incorporated   by  reference  to  Exhibit   10.10  to  the  Company's
          Registration Statement on Form S-4, as amended, File No. 333-35377) .

    10.56 EXCEL Shareholders  Agreement,  dated as of June 5, 1997, by and among
          Telco  Communications  Group, Inc. and each of the shareholders  party
          thereto  (incorporated by reference to Excelcom's Form 8-K, dated June
          5, 1997, as filed with the Commission on June 10, 1997).

    10.57 Telco Shareholders  Agreement,  dated June 5, 1997, by and among EXCEL
          Communications,  Inc.  and  each  of the  shareholders  party  thereto
          (incorporated by reference to Form 8-K of Telco Communications  Group,
          Inc.,  dated June 5, 1997,  as filed with the  Commission  on June 10,
          1997).

    10.58 Agreement for Billing  Services by Tel Labs,  Inc. and Esprit  Telecom
          dated December 29, 1995  (incorporated by reference to Exhibit 10.4 to
          Telco's  Registration  Statement  on Form S-1,  as  amended,  File No.
          333-05857).
<PAGE>

  Exhibit
    No.                          DESCRIPTION
  -------                        -----------

    10.59 Service Agreement between IXC Carrier,  Inc. and Telco  Communications
          Group,  Inc.  dated  December15,  1995  (incorporated  by reference to
          Exhibit  10.17 to  Telco's  Registration  Statement  on Form  S-1,  as
          amended, File No. 333-05857).

    10.60 Telco  Communications  Group, Inc.  Wholesale  Customer  Agreement for
          Special  International  Pricing with Esprit Telecom dated February 21,
          1996   (incorporated   by  reference  to  Exhibit   10.18  to  Telco's
          Registration Statement on Form S-1, as amended, File No. 333-05857).

    10.61 Equipment   leases   between   DSC  Finance   Corporation   and  Telco
          Communications  Group,  Inc.  (Master  Lease dated January 1, 1994 and
          Schedules A-P1) (incorporated by reference to Exhibit 10.29 to Telco's
          Registration Statement on Form S-1, as amended, File No. 333-05857).

    10.62 Carrier Agreement between AT&T Corp. and Telco  Communications  Group,
          Inc.,  dated December 23, 1996  (incorporated  by reference to Exhibit
          10.44 to  Telco's  Annual  Report  on Form  10-K  for the  year  ended
          December 31, 1996, File No. 0-28668).

    10.63 Network  Purchase   Agreement   between  Advantis  and  Telco  Network
          Services,  Inc.,  dated March 11, 1997  (incorporated  by reference to
          Exhibit 10.45 to Telco's Annual Report on Form 10-K for the year ended
          December 31, 1996, File No. 0-28668).

    10.64 Credit  Agreement,  dated as of October 10,  1997,  by and among EXCEL
          Communications,  Inc.,  the lenders party thereto,  Lehman  Commercial
          Paper  Inc.,  as  Arranger  and  Syndication  Agent,  Bank of  America
          National Trust and Savings Association and Nationsbank of Texas, N.A.,
          as   Documentation   Agents,   and  First  Union   National  Bank,  as
          Administrative Agent (incorporated by reference to Exhibit 99.2 to the
          Company's Form 8-K, dated October 14, 1997, File No. 001-13433).

    10.65 Deed of Lease  Agreement  between  Bricks in the Stock,  Ltd.  And Tel
          Labs, Inc. effective July 1, 1994 (Corporate Office)  (incorporated by
          reference to Exhibit 10.25 to Telco's  Registration  Statement on Form
          S-1, as amended, File No. 333-05857).

    10.66 Deed of Lease  Agreement  between  Bricks in the Stock,  Ltd.  And Tel
          Labs, Inc. effective March 1, 1995 (Corporate Office) (incorporated by
          reference to Exhibit 10.26 to Telco's  Registration  Statement on Form
          S-1, as amended, File No. 333-05857).

    10.67 Credit  Agreement  between  Telco and  Nationsbank  of Texas,  N.A. as
          Administrative   Lender  and   Lenders   dated   December   20,   1996
          (incorporated  by reference to Exhibit 10.43 to Telco's  Annual Report
          on Form 10-K for the year ended December 31, 1996, File No. 0-28668).

    10.68 Form  Indemnification  Agreement  by and  among  the  Company  and the
          Company's officers and directors.

    10.69 Amendment to the EXCEL  Communications,  Inc. Employee Ownership Plan,
          dated December 3, 1997.

     18.1 Change of Accounting Letter from Arthur Andersen LLP

     22.1 Subsidiaries of Excel Communications, Inc.

     23.1 Consent of Independent Public Accountants

     27.1 Financial Data Schedule as of December 31, 1997.


------------------------------------------------
#    Confidential Treatment has been requested.
##   Confidential Treatment has been granted.

<PAGE>