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

                                    FORM 10-Q

(MARK  ONE)

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

                                       OR

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

                     FOR THE TRANSITION PERIOD FROM     TO
                                                    ---    ---

                        COMMISSION FILE NUMBER 0 - 26728

                           TALK AMERICA HOLDINGS, INC.
             (Exact name of registrant as specified in its charter)

         DELAWARE                                   23-2827736
(State of incorporation)               (I.R.S. Employer Identification No.)


12020  SUNRISE  VALLEY  DRIVE,  SUITE  250,  RESTON,  VIRGINIA          20191
(Address of principal executive offices)                              (Zip Code)

                                 (703) 391-7500
              (Registrant's telephone number, including area code)


     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  the  number of shares outstanding of each of the issuer's classes
of  common  stock,  as  of  the  latest  practicable  date.

     27,296,166  shares  of  Common  Stock,  par  value of $0.01 per share, were
issued  and  outstanding  as  of  November  1,  2002.

<PAGE>

                  TALK AMERICA HOLDINGS, INC. AND SUBSIDIARIES


                                      INDEX
                                                                          PAGE
                                                                          ----
PART  I  -  FINANCIAL  INFORMATION:

Item 1.   Consolidated  Financial  Statements:

          Consolidated Statements of Operations - Three and Nine
          Months  Ended  September  30,  2002  and  2001  (unaudited)        3

          Consolidated  Balance  Sheets  -  September  30, 2002
          (unaudited)  and  December  31,  2001                              4

          Consolidated Statements of Cash Flows - Nine Months Ended
          September  30,  2002  and  2001  (unaudited)                       5

          Notes  to  Consolidated  Financial  Statements  (unaudited)        6

Item 2.   Management's  Discussion  and  Analysis  of
          Financial  Condition  and  Results  of  Operations                14

Item 3.   Quantitative and Qualitative Disclosure About Market Risk         27

Item 4.   Controls  and  Procedures                                         27

PART  II  -  OTHER  INFORMATION:

Item  2.  Changes  in  Securities                                           28

Item  6.  Exhibits  and  Reports  on  Form  8-K

          (a)  Exhibits                                                     28
          (b)  Reports  on  Form  8-K                                       28


                                        2
<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM  1.    CONSOLIDATED  FINANCIAL  STATEMENTS

<TABLE>
<CAPTION>

                                 TALK  AMERICA  HOLDINGS,  INC.  AND  SUBSIDIARIES
                                     CONSOLIDATED  STATEMENTS  OF  OPERATIONS
                                     (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
                                                    (UNAUDITED)

                                                                FOR THE THREE MONTHS        FOR THE NINE MONTHS
                                                                 ENDED SEPTEMBER 30,        ENDED SEPTEMBER 30,
                                                            ---------------------------  ---------------------------
                                                                2002           2001         2002             2001
                                                            -----------     -----------  -----------     -----------
<S>                                                             <C>            <C>          <C>              <C>
Sales                                                        $  79,133      $  126,335    $  236,253     $  390,560

Costs and expenses:
   Network and line costs                                       37,792          58,679       115,663        186,897
   General and administrative expenses                          11,958          20,537        40,166         64,248
   Provision for doubtful accounts                               2,190          28,888         8,998         79,437
   Sales and marketing expenses                                  6,829          12,123        19,637         68,581
   Depreciation and amortization                                 4,611          10,338        13,483         29,250
   Impairment and restructuring charges                             --         171,174            --        171,174
                                                            -----------     -----------   ----------     -----------
      Total costs and expenses                                  63,380         301,739       197,947        599,587
                                                            -----------     -----------   ----------     -----------

Operating income (loss)                                         15,753        (175,404)       38,306       (209,027)
Other income (expense):
   Interest income                                                 299             257           482          1,088
   Interest expense                                             (2,568)         (1,518)       (6,941)        (4,644)
   Other, net                                                     (106)         (2,501)         (922)        (2,581)
                                                            -----------     -----------   ----------     -----------

Income (loss) before provision for income taxes                 13,378        (179,166)       30,925       (215,164)
Provision for income taxes                                          --              --            --             --
                                                            -----------     -----------   ----------     -----------
Income (loss) before extraordinary gain and cumulative
   effect of an accounting change                               13,378        (179,166)       30,925       (215,164)
Extraordinary gain from extinguishments of debt                     --          16,867            --         16,867
Cumulative effect of an accounting change                           --              --            --        (36,837)
                                                            -----------     -----------   ----------     -----------

Net income (loss)                                            $  13,378     $  (162,299)    $  30,925    $  (235,134)
                                                            ===========     ===========   ==========     ===========

Income (loss) per share - Basic:
   Income (loss) before extraordinary gain and
      cumulative effect of an accounting change per share    $    0.49     $     (6.82)    $    1.14    $     (8.22)
   Extraordinary gain per share                                     --            0.64            --           0.64
   Cumulative effect of an accounting change per share              --              --            --          (1.41)
                                                            -----------     -----------   ----------     -----------
   Net income (loss) per share                               $    0.49     $     (6.18)    $    1.14    $     (8.99)
                                                            ===========     ===========   ==========     ===========
   Weighted average common shares outstanding                   27,243          26,247        27,217         26,166
                                                            ===========     ===========   ==========     ===========

Income (loss) per share - Diluted:
   Income (loss) before extraordinary gain and
      cumulative effect of an accounting change per share    $    0.45     $     (6.82)    $    1.09    $     (8.22)
   Extraordinary gain per share                                     --            0.64            --           0.64
   Cumulative effect of an accounting change per share              --              --            --          (1.41)
                                                            -----------     -----------   ----------     -----------
   Net income (loss) per share                               $    0.45     $     (6.18)    $    1.09    $     (8.99)
                                                            ===========     ===========   ==========     ===========

   Weighted average common and common equivalent
      shares outstanding                                        29,617          26,247        28,501         26,166
                                                            ===========     ===========   ==========     ===========
               See  accompanying  notes  to  consolidated  financial statements.
</TABLE>

                                        3
<PAGE>

<TABLE>
<CAPTION>

                              TALK  AMERICA  HOLDINGS,  INC.  AND  SUBSIDIARIES
                                        CONSOLIDATED BALANCE SHEETS
                            (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

                                                                             SEPTEMBER 30,    DECEMBER 31,
                                                                                 2002             2001
                                                                            --------------   -------------
                                                                             (UNAUDITED)
<S>                                                                               <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                  $  41,067       $  22,100
   Accounts receivable, trade (net of allowance for uncollectible accounts
      of $11,956 and $46,404 at September 30, 2002 and December 31,
      2001, respectively)                                                        23,628          26,647
   Prepaid expenses and other current assets                                      1,691           1,951
                                                                            --------------   -------------
         Total current assets                                                    66,386          50,698

Property and equipment, net                                                      68,189          75,879
Goodwill                                                                         19,503          19,503
Intangibles, net                                                                  8,089          10,169
Other assets                                                                      8,113           8,972
                                                                            --------------   -------------
                                                                              $ 170,280       $ 165,221
                                                                            ==============   =============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable                                                           $  29,763       $  43,098
   Sales, use and excise taxes                                                   10,478           8,339
   Deferred revenue                                                               6,480          10,193
   Current portion of long-term debt                                             15,257          10,544
   4.5% Convertible subordinated notes due 2002                                      --           3,910
   Accrued compensation                                                           5,352           1,108
   Other current liabilities                                                      6,559          10,081
                                                                            --------------   -------------
         Total current liabilities                                               73,889          87,273
                                                                            --------------   -------------

Long-term debt:
   Senior credit facility                                                            --          12,500
   8% Convertible notes due 2011 (includes future accrued interest of
      $28,824 and $30,982 at September 30, 2002 and December 31, 2001,
      respectively)                                                              63,102          63,755
   12% Senior subordinated notes due 2007                                        71,681              --
   8% Convertible senior subordinated notes due 2007 (includes future
      accrued interest of $1,281 at September 30, 2002)                           4,103              --
   4.5% Convertible subordinated notes due 2002                                      --          57,934
   5% Convertible subordinated notes due 2004                                       670          18,093
   Other long-term debt                                                              42              88
                                                                            --------------   -------------
         Total long-term debt                                                   139,598         152,370
                                                                            --------------   -------------

Commitments and contingencies

Stockholders' equity (deficit):
   Preferred stock - $.01 par value, 5,000,000 shares authorized; no shares
      outstanding                                                                    --              --
   Common stock - $.01 par value, 100,000,000 shares authorized;
      27,264,911 and 27,150,907 shares issued and outstanding at
      September 30, 2002 and December 31, 2001, respectively                        273             272
   Additional paid-in capital                                                   351,458         351,169
   Accumulated deficit                                                         (394,938)       (425,863)
                                                                            --------------   -------------
         Total stockholders' equity (deficit)                                   (43,207)        (74,422)
                                                                            --------------   -------------
                                                                              $ 170,280       $ 165,221
                                                                            ==============   =============
               See  accompanying  notes  to  consolidated  financial statements.
</TABLE>

                                        4
<PAGE>

<TABLE>
<CAPTION>

                           TALK AMERICA HOLDINGS, INC. AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          (IN THOUSANDS)
                                            (UNAUDITED)
                                                                               NINE MONTHS ENDED
                                                                                 SEPTEMBER 30,
                                                                          ---------------------------
                                                                               2002           2001
                                                                          -------------   -----------
<S>                                                                            <C>             <C>
Cash flows from operating activities:
   Net income (loss)                                                        $  30,925     $ (235,134)
   Reconciliation of net income (loss) to net cash provided by
      (used in) operating activities:
      Provision for doubtful accounts                                           8,998         79,437
      Depreciation and amortization                                            13,483         29,250
      Impairment and restructuring charges                                         --        171,174
      Cumulative effect of an accounting change for contingent redemptions         --         36,837
      Extraordinary gain from restructuring of contingent redemptions              --        (16,867)
      Unrealized loss on increase in fair value of contingent redemptions          --          2,372
      Gain on legal settlement                                                  (1,681)           --
      Loss on sale and retirement of assets                                        205           116
      Other non-cash charges                                                     1,091            77
      Changes in assets and liabilities:
         Accounts receivable, trade                                             (5,979)      (68,200)
         Prepaid expenses and other current assets                                 393           (61)
         Other assets                                                            1,622           529
         Accounts payable                                                      (13,335)       (7,649)
         Deferred revenue                                                       (3,713)       (4,877)
         Sales, use and excise taxes                                             2,139           689
         Other liabilities                                                       1,008         4,195
                                                                          -------------   -----------
            Net cash provided by (used in) operating activities                 35,156        (8,112)
                                                                          -------------   -----------

Cash flows from investing activities:
   Capital expenditures                                                         (3,011)       (2,784)
   Capitalized software development costs                                       (1,753)         (656)
   Acquisition of intangibles                                                      (50)         (154)
                                                                          -------------   -----------
           Net cash used in investing activities                                (4,814)       (3,594)
                                                                          -------------   -----------

Cash flows from financing activities:
   Payments of borrowings                                                       (4,170)       (1,347)
   Payments of convertible debt                                                 (6,279)           --
   Payments of capital lease obligations                                        (1,022)           --
   Payments in connection with restructuring contingent redemptions                 --        (3,525)
   Exercise of stock options                                                        96            --
                                                                          -------------   -----------
           Net cash used in financing activities                               (11,375)       (4,872)
                                                                          -------------   -----------

Net increase (decrease) in cash and cash equivalents                            18,967       (16,578)
Cash and cash equivalents, beginning of period                                  22,100        40,604
                                                                          -------------   -----------
Cash and cash equivalents, end of period                                     $  41,067     $  24,026
                                                                          =============   ===========
               See  accompanying  notes  to  consolidated  financial statements.
</TABLE>

                                        5
<PAGE>

NOTE  1.  ACCOUNTING  POLICIES

(A)  BASIC  PRESENTATION

     The  consolidated financial statements include the accounts of Talk America
Holdings,  Inc.  and  its wholly owned subsidiaries, primarily Talk America Inc.
(collectively,  the  "Company"),  and  have been prepared as if the entities had
operated  as  a  single  consolidated  group  since  their  respective  dates of
incorporation.  All intercompany balances and transactions have been eliminated.

     The  consolidated  financial  statements  and  related  notes thereto as of
September  30,  2002  and for the three and nine months ended September 30, 2002
and  September  30,  2001  are  presented  as  unaudited  but  in the opinion of
management  include  all adjustments necessary to present fairly the information
set  forth  therein. The consolidated balance sheet information for December 31,
2001 was derived from the audited financial statements included in the Company's
Form  10-K,  as  amended  by its Form 10-K/A filed April 12, 2002. These interim
financial  statements  should  be  read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2001, as amended by its Form
10-K/A  filed April 12, 2002. The interim results are not necessarily indicative
of  the  results  for  any  future periods. Certain prior year amounts have been
reclassified  to  conform  to  the  current  year's  presentation.

     Effective  October  15,  2002,  the  Company's  stockholders  approved  a
one-for-three  reverse stock split of the Company's common stock, decreasing the
number  of common shares authorized from 300 million to 100 million. The reverse
stock  split  has  been  reflected  retroactively  in the accompanying financial
statements  and notes for all periods presented and all applicable references as
to  the number of common shares and per share information, stock option data and
market  prices  have  been  restated  to  reflect  this  reverse stock split. In
addition, stockholders' equity (deficit) has been restated retroactively for all
periods presented for the par value of the number of shares that were eliminated
as  a  result  of  the  reverse  stock  split.

(B)  RISKS  AND  UNCERTAINTIES

     Future  results  of operations involve a number of risks and uncertainties.
Factors  that  could  affect  future  operating results and cash flows and cause
actual  results  to vary materially from historical results include, but are not
limited  to:

     -    The Company's business strategy with respect to bundled local and long
          distance  services  may  not  succeed
     -    Failure  to  manage, or difficulties in managing, the Company's growth
          and  operations including attracting and retaining qualified personnel
          and  expanding into new markets with competitive pricing and favorable
          gross  margins
     -    Dependence  on  the  availability and functionality of incumbent local
          telephone  companies' networks as they relate to the unbundled network
          element  platform
     -    Increased  price  competition  in local and long distance services and
          overall  competition  within  the  telecommunications  industry
     -    Failure  or  interruption  in the Company's network and technology and
          information  systems
     -    Changes  in  government  policy,  regulation  and  enforcement  and/or
          adverse judicial interpretations and rulings related to regulation and
          enforcement
     -    Failure of the marketing of the bundle of the Company's local and long
          distance  services under agreements with its direct marketing channels
          and its various marketing partners and failure to successfully add new
          marketing  partners
     -    Inability  to  adapt  to  technological  change
     -    Inability  to  manage  customer  attrition  or  turnover  and bad debt
          expense  and  to  lower  customer  acquisition  costs
     -    Adverse change in the Company's relationship with its vendors or other
          third  party  carriers
     -    Failure  or  bankruptcy of other telecommunications companies whom the
          Company  relies  upon  for  services  and  revenues
     -    Ability  to  realize  the  full  benefit  of  the  net  operating loss
          carryforwards  on  future  taxable  income  generated  by  the Company

     Negative  developments  in  these areas could have a material effect on the
Company's  business,  financial  condition  and  results  of  operations.

                                        6
<PAGE>

(C)  NEW  ACCOUNTING  PRONOUNCEMENTS

     Effective  January  1,  2002,  the  Company  adopted Statement of Financial
Accounting  Standards  No.  142,  "Goodwill  and Other Intangible Assets," which
establishes  the  impairment  approach  rather  than  amortization for goodwill.
Effective  January  1,  2002,  the  Company  was  no  longer  required to record
amortization  expense  on  goodwill,  but  instead is required to evaluate these
assets  for  potential impairment at least annually and will test for impairment
between  annual  tests  if  an  event  occurs or circumstances change that would
indicate the carrying amount may be impaired. An impairment loss would generally
be  recognized  when  the  carrying  amount  of  the reporting units' net assets
exceeds  the  estimated  fair  value  of  the  reporting  unit.

     In order to complete the transitional assessment of goodwill as required by
SFAS 142, the Company was required to determine by June 30, 2002, the fair value
of  the  reporting  unit  associated  with  the  goodwill  and compare it to the
reporting  unit's carrying amount, including goodwill. To the extent a reporting
unit's carrying amount exceeded its fair value, an indication would have existed
that  the  reporting unit's goodwill assets may be impaired and the Company must
perform the second step of the transitional impairment test. In the second step,
the  Company  must  compare  the  implied  fair  value  of  the reporting unit's
goodwill, determined by allocating the reporting unit's fair value to all of its
assets  and  liabilities  in  a manner similar to a purchase price allocation in
accordance  with SFAS 141, "Business Combinations," to its carrying amount, both
of  which  would  be  measured  as  of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of 2002.
Any  transitional  impairment charge will be recognized as the cumulative effect
of  a  change in accounting principle in the Company's consolidated statement of
operations.  The  Company  completed the transitional assessment of goodwill and
determined  that  the  fair  value  of  the  reporting unit exceeds its carrying
amount,  thus  goodwill  is not considered impaired. Since the fair value of the
reporting  unit  exceeded the carrying amount under the transitional assessment,
the  Company  does  not  need  to  perform  the  second step of the transitional
impairment test. The Company determined that it has one reporting unit under the
guidance of SFAS 142. The fair value was determined primarily using a discounted
cash flow approach and quoted market price of the Company's stock. The amount of
goodwill  reflected  in  the  balance  sheet  as of September 30, 2002 was $19.5
million.  The  required impairment tests of goodwill may result in future period
write-downs.

     The following unaudited pro forma summary presents the adoption of SFAS 142
as  of  the  beginning  of  the  periods presented to eliminate the amortization
expense  recognized  in  those  periods  related  to goodwill that are no longer
required  to  be  amortized. The pro forma amounts for the three and nine months
ended  September  30, 2001 do not include any write-downs of goodwill that could
have  resulted  had  the  Company  adopted  SFAS  142 as of the beginning of the
periods  presented  and  performed  the  required  impairment  test  under  this
standard.

<TABLE>
<CAPTION>
                                             FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                                    SEPTEMBER 30,                SEPTEMBER 30,
                                             --------------------------    -------------------------
                                                  2002         2001           2002          2001
                                             ------------   -----------    ------------   ----------
<S>                                               <C>           <C>            <C>           <C>
Net income (loss) as reported                  $ 13,378     $(162,299)       $ 30,925     $(235,134)
Goodwill amortization                                --         5,502              --        15,955
                                             ------------   -----------    ------------   ----------
Adjusted net income (loss)                     $ 13,378     $(156,797)       $ 30,925     $(219,179)
                                             ============   ===========    ============   ==========

Basic income (loss) per share:
   Net income (loss) as reported per share     $   0.49     $   (6.18)       $   1.14     $   (8.99)
   Goodwill amortization per share                   --          0.21              --          0.61
                                             ------------   -----------    ------------   ----------
   Adjusted net income (loss) per share        $   0.49     $   (5.97)       $   1.14     $   (8.38)
                                             ============   ===========    ============   ==========

Diluted income (loss) per share:
   Net income (loss) as reported per share     $   0.45     $   (6.18)       $   1.09     $   (8.99)
   Goodwill amortization per share                   --          0.21              --          0.61
                                             ------------   -----------    ------------   ----------
   Adjusted net income (loss) per share        $   0.45     $   (5.97)       $   1.09     $   (8.38)
                                             ============   ===========    ============   ==========
</TABLE>

                                        7
<PAGE>

      Intangible  assets consisted primarily of purchased customer accounts with
a  definite  life and are being amortized on a straight-line basis over 5 years.
The  Company  incurred amortization expense on intangible assets with a definite
life  of  $0.7  million  and  $2.1  million  for the three and nine months ended
September  30,  2002,  and  $0.8 million and $3.0 million for the three and nine
months  ended  September  30,  2001.  The Company's balance of intangible assets
with  a definite life was $8.1 million at September 30, 2002, net of accumulated
amortization  of  $5.5 million. Amortization expense on intangible assets with a
definite  life  for  the  next 5 years as of September 30, is as follows: 2003 -
$2.8  million, 2004 - $2.8 million, 2005 - $2.4 million and 2006 - $0.1 million.

     In  August  2001, the Financial Accounting Standards Board issued Statement
of  Financial  Accounting  Standards  No.  143,  "Accounting  for  Obligations
Associated  with  the  Retirement  of  Long-Lived  Assets." SFAS 143 establishes
accounting  standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. It also provides accounting
guidance  for  legal  obligations  associated  with  the  retirement of tangible
long-lived  assets.  SFAS  143 is effective in fiscal years beginning after June
15, 2002, with early adoption permitted. The Company expects that the provisions
of  SFAS  143  will  not  have  a material effect on its consolidated results of
operations  or  financial  position  upon  adoption.

     Effective  January  1,  2002,  the  Company  adopted Statement of Financial
Accounting  Standards  No.  144,  "Accounting  for the Impairment or Disposal of
Long-Lived  Assets."  SFAS  144  establishes  a  single accounting model for the
impairment  or disposal of long-lived assets, including discontinued operations.
SFAS  144  superseded  Statement  of  Financial  Accounting  Standards  No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be  Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual  and  Infrequently  Occurring Events and Transactions." Adoption of SFAS
144  has  had  no  impact on the Company's consolidated results of operations or
financial  position.

     Effective  January  1,  2002, the Company also adopted Emerging Issues Task
Force  (EITF)  01-09,  "Accounting  for  Consideration  Given  by  a Vendor to a
Customer  or  a  Reseller  of  the  Vendor's Products." This issue presumes that
consideration  from  a vendor to a customer or reseller of the vendor's products
is  a  reduction  of the selling prices of the vendor's products and, therefore,
should  be  characterized  as  a  reduction  of  revenue  when recognized in the
vendor's  statement  of  operations  and  could  lead  to negative revenue under
certain  circumstances.  Revenue  reduction is required unless the consideration
relates  to a separate, identifiable benefit and the benefit's fair value can be
established.  The  adoption  of  this  issue  resulted  in a reclassification of
approximately  $7.3  million from sales and marketing expenses to a reduction of
net  sales  for  the  nine  months ended September 30, 2001 attributed to direct
marketing  promotion  check campaigns. The adoption of EITF 01-09 did not have a
material effect on the Company's consolidated financial statements for the three
months  ended  September  30, 2001 and the three and nine months ended September
30,  2002,  as  the  Company  did  not have any direct marketing promotion check
campaigns  during  these  periods.

     In  May  2002, the Financial Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statements No. 13, and Technical Corrections as of
April 2002." SFAS 145 eliminates the requirement to report gains and losses from
extinguishment  of  debt  as  extraordinary  items.  Gains  and  losses  from
extinguishment  of  debt  will  now be classified as extraordinary items only if
they  meet  the criteria of APB Opinion No. 30. Generally, SFAS 145 is effective
in  fiscal  years  beginning after May 15, 2002, with early adoption encouraged.
The  Company will adopt SFAS 145 effective January 1, 2003. The adoption of SFAS
145 will result in a reclassification from extraordinary gains (losses) from the
extinguishment  of  debt  to  other  income  (expense).

     In  July 2002, the Financial Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 146,  "Accounting for Costs Associated with
Exit  or  Disposal  Activities."  SFAS  146 requires that a liability for a cost
that  is  associated  with  an  exit or disposal activity be recognized when the
liability  is  incurred.  SFAS  146  also  establishes  that  fair  value is the
objective  for  the  initial measurement of the liability. SFAS 146 is effective
for  exit  or  disposal  activities  that are initiated after December 31, 2002.

                                        8
<PAGE>

NOTE  2.  CONVERTIBLE  SUBORDINATED  NOTES  AND  EXCHANGE  OFFERS

     Effective  April  4,  2002,  the  Company  completed  the exchange of $57.9
million  of  the  $61.8  million  outstanding  principal  balance  of its 4 1/2%
Convertible  Subordinated  Notes  ("4  1/2% Notes") that mature on September 15,
2002 into $53.2 million of new 12% Senior Subordinated PIK Notes due August 2007
("12%  Notes")  and $2.8 million of new 8% Convertible Senior Subordinated Notes
due  August  2007  ("8%  Notes") and cash paid of $0.5 million. In addition, the
Company  exchanged  $17.4  million  of  the  $18.1 million outstanding principal
balance  of  its  5%  Convertible Subordinated Notes ("5% Notes") that mature on
December  15,  2004  into  $17.4  million  of  the  new  12%  Notes.

     The  new  12%  Notes  accrue  interest  at  a  rate  of 12% per year on the
principal  amount,  payable  two times a year on each February 15 and August 15,
beginning  on  August  15,  2002.  Interest  is payable in cash, except that the
Company  may,  at  its  option,  pay  up to one-third of the interest due on any
interest payment date through and including the August 15, 2004 interest payment
date  in  additional 12% Notes. The new 8% Notes accrue interest at a rate of 8%
per  year  on the principal amount, payable two times a year on each February 15
and  August  15, beginning on August 15, 2002 and are convertible, at the option
of  the  holder, into common stock at $15.00 per share. The 12% and 8% Notes are
redeemable  at  any  time at the option of the Company at par value plus accrued
interest  to  the  redemption  date,  although  the  AOL Restructuring Agreement
restricts the Company's ability to redeem the 12% and 8% Notes (see Note 3).  In
addition,  the  Company is not required to make mandatory redemption payments to
repurchase  the  new notes or the 5% Notes in the case of a change of control of
the  Company  or  to  repurchase  the notes on the termination of trading of the
Company's  common  stock  on  a  national  securities  exchange  or  established
automated  over-the-counter  trading  market.

     In  accordance  with  SFAS No. 15, "Accounting by Debtors and Creditors for
Troubled  Debt  Restructurings,"  the  exchange  of  the 4 1/2% Notes into $53.2
million  of the 12% Notes and $2.8 million of the 8% Notes is accounted for as a
troubled  debt  restructuring. Since the total liability of $57.4 million ($57.9
million  of  principal  as  of  the  exchange  date,  less cash payments of $0.5
million) is less than the future cash flows to holders of 8% Notes and 12% Notes
of  $91.5 million (representing the $56.0 million of principal and $35.5 million
of  future  interest  expense),  the  liability remained on the balance sheet at
$57.4  million  as  long-term  debt.  The  difference  of  $1.4  million between
principal and the carrying amount is being recognized as a reduction of interest
expense  over  the  life  of  the  new  notes.

NOTE  3.  AOL  AGREEMENTS

     On  September  19, 2001, the Company restructured its financial obligations
with  America  Online,  Inc.  ("AOL")  that arose under the Investment Agreement
entered  into  on January 5, 1999 and also ended its marketing relationship with
AOL  effective  September  30,  2001  (collectively the "AOL Restructuring"). In
connection  with  the  AOL  Restructuring,  the  Company  and AOL entered into a
Restructuring  and  Note Agreement ("Restructuring Agreement") pursuant to which
the  Company  issued  to  AOL  $54.0  million principal amount of its 8% secured
convertible  notes  due  September 2011 ("2011 Convertible Notes") and 1,026,209
additional  shares  of  the  Company's  common  stock.

     Pursuant  to  the  Restructuring  Agreement,  in  exchange  for  and  in
cancellation  of the Company's warrants to purchase 907,328 shares of the common
stock  and  the  Company's related obligations under the Investment Agreement to
repurchase  such  warrants from AOL, the Company issued the 1,026,209 additional
shares  of  its  common stock to AOL, after which AOL holds a total of 2,400,000
shares  of  common  stock.  The  Company  agreed to provide certain registration
rights  to AOL in connection with the shares of common stock issued to it by the
Company.

     The  Restructuring  Agreement  provided  that the Investment Agreement, the
Security  Agreement  securing  the  Company's  obligations  under the Investment
Agreement  and  the  existing  Registration  Rights  Agreement  with  AOL  were
terminated  in  their  entirety  and  the parties were released from any further
obligation  under  these agreements. In addition, AOL, as the holder of the 2011
Convertible  Note, entered into an intercreditor agreement with the lender under
the  Company's  existing  secured  credit  facility,  which  survives  the early
retirement  of  debt  under  the  Company's Senior Credit Facility (see Note 5).

                                        9
<PAGE>

     The  2011  Convertible  Notes  were issued in exchange for a release of the
Company's reimbursement obligations under the Investment Agreement. AOL, in lieu
of any other payment for the early discontinuance of the marketing relationship,
paid  the  Company  $20.0 million by surrender and cancellation of $20.0 million
principal  amount  of  the  2011  Convertible  Notes  delivered  to AOL, thereby
reducing the outstanding principal amount of the 2011 Convertible Notes to $34.0
million. The 2011 Convertible Notes are convertible into shares of the Company's
common  stock at the rate of $15.00 per share, may be redeemed by the Company at
any  time  without premium and are subject to mandatory redemption at the option
of the holder on September 15, 2006 and September 15, 2008. The 2011 Convertible
Notes  accrue  interest  at  the  rate  of  8% per year on the principal amount,
payable  two  times a year on January 1 and July 1; interest is payable in cash,
except  that  the  Company  may  elect to pay up to 50% (100% in the case of the
first  interest payment) of the interest due on any payment date, in kind rather
than  in  cash.  The  2011  Convertible  Notes  are  guaranteed by the Company's
principal  operating  subsidiaries  and are secured by a pledge of the Company's
and  the  subsidiaries'  assets.

     In  addition  to  the  restructuring of the financial obligations discussed
above,  the  Company  and  AOL agreed, in a further amendment to their marketing
agreement,  dated  as  of  September  19,  2001, to discontinue, effective as of
September  30, 2001, their marketing relationship under the marketing agreement.
In  connection with this discontinuance, the Company paid AOL $6.0 million under
the marketing agreement, payable in two installments - $2.5 million on September
20,  2001 and the remaining $3.5 million on October 4, 2001. AOL, in lieu of any
other  payment  for the early discontinuance of the marketing relationship, paid
the  Company  $20 million by surrender and cancellation of $20 million principal
amount  of  the  2011  Convertible  Notes  delivered  to AOL as discussed above,
thereby  reducing the outstanding principal amount of the 2011 Convertible Notes
to  $34  million.  The amendment also provided for the payment by the Company of
certain  expenses related to marketing services until the discontinuance and for
the  continued  servicing  and  transition  of  telecommunications  customer
relationships  after  the  discontinuance  of  marketing.

     In  accordance  with  SFAS No. 15, "Accounting by Debtors and Creditors for
Troubled  Debt  Restructurings," the AOL Restructuring transaction was accounted
for  as  a troubled debt restructuring. The Company combined all liabilities due
AOL  at  the  time  of  the  Restructuring  Agreement,  including the contingent
redemption  feature  of  the  warrants  with  a  value  of $34.2 million and the
contingent redemption feature of the common stock with a value of $54.0 million.
The  total  liability  of  $88.2  million  was  reduced by the fair value of the
1,026,209  incremental  shares  provided to AOL of $1.4 million and cash paid in
connection with the AOL Restructuring of $3.5 million. Since the remaining value
of  $83.3 million was greater than the future cash flows to AOL of $66.4 million
(representing  the $34.0 million of convertible debt and $32.4 million of future
interest  expense),  the  liability  was written down to the value of the future
cash flows due to AOL and an extraordinary gain of $16.9 million was recorded in
the third quarter of 2001. As a result of this accounting treatment, the Company
will  record  no  interest  expense  associated  with these convertible notes in
future  periods  in  the  Company's  statements  of  operations.

     On  February  21, 2002, by letter agreement, AOL agreed, subject to certain
conditions,  to  waive  certain  rights  that  it  had  under  the Restructuring
Agreement with respect to the Company's restructuring of its existing 4 1/2% and
5%  Notes.  Under  the letter agreement, the Company also paid AOL approximately
$1.2  million  as  a prepayment on the 2011 Convertible Note, approximately $0.7
million  of  which  was  credited against amounts the Company owed AOL under the
letter  agreement  for cash payments in the exchange offers. After giving effect
to  the  prepayment,  and taking into account the interest that had been paid on
the  2011 Convertible Notes as additional principal, there was outstanding as of
September  30,  2002, an aggregate of $34.3 million principal amount of the 2011
Convertible  Notes  and  the Company complied with the various conditions of the
letter  agreement  and  did  not  owe AOL any additional payments related to the
exchange  offers.

     On  January  5,  1999,  the  Company  and  AOL  entered  into an Investment
Agreement.  Under  the  terms of the Investment Agreement, the Company agreed to
reimburse  AOL  for  losses  AOL  may incur on the sale of certain shares of the
Company's  common  stock.  In  addition,  AOL  also had the right to require the
Company  to  repurchase  warrants  held  by AOL.  Upon the occurrence of certain
events,  including material defaults by the Company under its AOL agreements and
a  "change  of  control" of the Company, the Company could have been required to
repurchase  for  cash  all  of the shares held by AOL for $78.3 million ($57 per
share),  and  the  warrants  for  $36.3  million.

                                       10
<PAGE>

     The  Company had originally recorded the contingent redemption value of the
common  stock  and  warrants  at  $78.3  and $36.3 million, respectively, with a
corresponding  reduction  in  additional paid-in capital. In connection with the
implementation  of  EITF  00-19, the contingent redemption feature of the common
stock  and  warrants  were recorded as a liability at their fair values of $53.5
and  $32.3  million, respectively, as of June 30, 2001. The increase in the fair
value  of  these  contingent  redemption instruments from issuance on January 5,
1999  to  June  30,  2001  was  $36.8  million,  which  has  been presented as a
cumulative  effect  of  a  change  in  accounting  principle in the statement of
operations.  For  the  quarter ended September 30, 2001, the Company recorded an
unrealized  loss  of  $2.4  million  on  the  increase  in the fair value of the
contingent redemption instruments, which was reflected in other (income) expense
on  the statement of operations. As discussed above, these contingent redemption
instruments were satisfied through the Restructuring Agreement entered into with
AOL  on  September  19,  2001.

NOTE  4.  LEGAL  PROCEEDINGS

     In  the third quarter of 2002, the Company paid $140,000 in connection with
the  favorable  settlement  of litigation relating to an obligation with a third
party that had previously been reflected as a liability, and recorded a non-cash
gain  in  the  amount  of  $1.7  million.

     On November 12, 2001, the Company received an award of arbitrators awarding
Traffix,  Inc.  approximately  $6.2  million  in  an  arbitration concerning the
termination  of a marketing agreement between the Company and Traffix, which the
parties agreed would be paid in two installments - $3.7 million paid in November
2001  and  the  remaining  $2.5  million  paid  on April 1, 2002.  The Company's
obligations  to  Traffix  have  been  satisfied.

     The  Company  also  is a party to a number of legal actions and proceedings
arising  from  the  Company's  provision  and  marketing  of  telecommunications
services,  as  well  as  certain legal actions and regulatory investigations and
enforcement  proceedings arising in the ordinary course of business. The Company
believes  that  the ultimate outcome of the foregoing actions will not result in
liability  that  would have a material adverse effect on the Company's financial
condition  or  results  of  operations. However, it is possible that, because of
fluctuations  in  the  Company's  cash position, the timing of developments with
respect  to  such  matters that require cash payments by the Company, while such
payments  are  not expected to be material to the Company's financial condition,
could  impair  the  Company's  ability  in  future  interim or annual periods to
continue  to  implement  its  business  plan,  which could affect its results of
operations  in  future  interim  or  annual  periods.

NOTE  5.  SENIOR  CREDIT  FACILITY

     On  October  4,  2002,  the  principal  operating  subsidiaries  of Company
retired,  prior to maturity, all of the debt outstanding under the Senior Credit
Facility Agreement between the subsidiaries and MCG Finance Corporation ("MCG").
Accordingly,  the  entire  principal  balance  as of September 30, 2002 of $13.8
million has been reflected in the current portion of long-term debt.  The Senior
Credit  Facility  Agreement  was secured by a pledge of all of the assets of the
subsidiaries  of  the  Company  that  were a party to the Senior Credit Facility
Agreement.  In  addition,  the  Company had guaranteed the obligations under the
Senior Credit Facility Agreement. The Senior Credit Facility Agreement subjected
the  Company  and its subsidiaries to certain restrictions and covenants related
to  among  other  things,  liquidity, per-subscriber-type of revenue, subscriber
acquisition  costs  and interest coverage ratio requirements. As a result of the
retirement of the debt under the Senior Credit Facility Agreement, the pledge of
assets  and  the  restrictions  and  covenants  under the Senior Credit Facility
Agreement  were  terminated  and  the  Company  will  incur a one-time, non-cash
extraordinary  charge  to  earnings  of approximately $1.1 million in the fourth
quarter  of  2002,  reflecting  the  acceleration of the amortization of certain
deferred  finance  charges  and  fees.

     The  Credit  Facility  Agreement  provided  for  a term loan of up to $20.0
million  maturing on June 30, 2005 and a line of credit facility permitting such
subsidiaries  to borrow up to an additional $30.0 million available through June
30,  2003.  The  availability  of the line of credit facility was subject, among
other  things,  to  the successful syndication of that facility. No amounts were
outstanding  or  available under the line of credit facility as of September 30,
2002.  Loans  under  the Credit Facility Agreement bore interest at a rate equal
to  either  (a) the Prime Rate, or (b) LIBOR, plus, in each case, the applicable
margin. The applicable margin was 7.0% for borrowings accruing interest at LIBOR
and  6.0%  for  borrowings accruing interest at the Prime Rate. The principal of
the  term  loan  was paid in quarterly installments of $1.25 million on the last
calendar  day  of  each  fiscal  quarter  commencing  on  September  30,  2001.

                                       11
<PAGE>

     In connection with the AOL Restructuring, MCG entered into an Intercreditor
Agreement with AOL, which survives the early retirement of debt under the Credit
Facility  Agreement  (see  Note  3).

NOTE  6.  IMPAIRMENT  AND  RESTRUCTURING  CHARGES

     In  the third quarter of 2001, the Company recorded an impairment charge of
$168.7  million, primarily related to the write-down of goodwill associated with
the  acquisition  of Access One Communications Corp., ("Access One"), a private,
local  telecommunications  service  provider  to nine states in the southeastern
United  States. The goodwill was created by purchase accounting treatment of the
Access  One  merger transaction that closed in August 2000. SFAS 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," required the evaluation of impairment of long-lived assets and identifiable
intangibles  whenever  events  or  changes  in  circumstances  indicate that the
carrying  amount  of an asset may not be recoverable. Management determined that
goodwill should be evaluated for impairment in accordance with the provisions of
SFAS  121 due to the increased bad debt rate and increased customer turnover, as
well  as  the AOL Restructuring that occurred in the quarter ended September 30,
2001. The Company addressed these operational issues by improving credit quality
through  credit  scoring  the  existing  and  future customer base, slowing down
growth  of  new  expected  customers  through  decreased marketing, and lowering
product  pricing. These and other actions taken by the Company resulted in lower
current  and  future  projected  growth  of bundled revenues and cash flows than
those  originally projected at the time of the Access One merger. The write-down
of  goodwill was based on an analysis of projected discounted cash flows using a
discount  rate  of  18%,  which  results  determined  that the fair value of the
goodwill  was  substantially  less  than  the  carrying  value.

     In  September  2001,  the  Company approved a plan to close one of its call
center  operations. The Company recorded a charge of $2.5 million in the quarter
ended  September  30,  2001  to  reflect  the  elimination  of approximately 225
positions  amounting  to  $1.0  million  and  lease exit costs amounting to $1.5
million  in connection with the call center closure. The employees identified in
the  plan were notified in September 2001 and terminated in October 2001. Actual
restructuring  costs  were  $1.9  million, comprised of $1.2 million of employee
severance  costs  and  $0.7  million  of lease termination and other call center
closure costs.  Accordingly, a $0.6 million credit was recorded in the statement
of  operations  for  the  fourth  quarter of 2001 for the difference between the
original  restructuring  charge of $2.5 million and the actual costs incurred of
$1.9  million.

                                       12
<PAGE>

NOTE  7.  PER  SHARE  DATA

     Basic earnings per common share is calculated by dividing net income by the
average  number of common shares outstanding during the period. Diluted earnings
per  common  share  is  calculated  by  adjusting  outstanding  shares, assuming
conversion  of  all potentially dilutive stock options, warrants and convertible
bonds.  Earnings  per  share  are  computed  as  follows  (in  thousands):

<TABLE>
<CAPTION>
                                                  FOR THE THREE MONTHS ENDED        FOR THE NINE MONTHS
                                                        SEPTEMBER 30,               ENDED SEPTEMBER 30,
                                                  --------------------------     --------------------------
                                                      2002           2001           2002            2001
                                                  ------------   -----------     ------------  ------------
<S>                                                    <C>           <C>            <C>             <C>
Income (loss) before extraordinary gain and
   cumulative effect of an accounting change       $ 13,378       $(179,166)       $ 30,925    $(215,164)
Extraordinary gain                                       --          16,867              --       16,867
Cumulative effect of an accounting change                --              --              --      (36,837)
                                                  ------------   -----------     ------------  ------------
Net income (loss)                                  $ 13,378       $(162,299)       $ 30,925    $(235,134)
                                                  ============   ===========     ============  ============

Average shares of common stock outstanding
   used to compute basic earnings per share          27,243          26,247          27,217       26,166
Additional common shares to be issued
   assuming exercise of stock options and
   warrants *                                         2,374              --           1,284           --
                                                  ------------   -----------     ------------   -----------
Average shares of common and common
   equivalent stock outstanding used to compute
   diluted earnings per share                        29,617          26,247          28,501       26,166
                                                  ============   ===========     ============  ============

Income (loss) per share - Basic:
   Income (loss) before extraordinary gain and
      cumulative effect of an accounting change
      per share                                    $   0.49       $   (6.82)       $   1.14    $   (8.22)
   Extraordinary gain per share                          --            0.64              --         0.64
   Cumulative effect of an accounting change
      per share                                          --              --              --        (1.41)
                                                  ------------   -----------     ------------   -----------
   Net income (loss) per share                     $   0.49       $   (6.18)       $   1.14    $   (8.99)
                                                  ============   ===========     ============  ============

   Weighted average common shares
      outstanding                                    27,243          26,247          27,217       26,166
                                                  ============   ===========     ============  ============

Income (loss) per share - Diluted:
   Income (loss) before extraordinary gain and
      cumulative effect of an accounting change
      per share                                    $   0.45       $   (6.82)       $   1.09    $   (8.22)
   Extraordinary gain per share                          --            0.64              --         0.64
   Cumulative effect of an accounting change
      per share                                          --              --              --        (1.41)
                                                  ------------   -----------     ------------   -----------
   Net income (loss) per share                     $   0.45       $   (6.18)       $   1.09    $   (8.99)
                                                  ============   ===========     ============  ============

   Weighted average common and common
      equivalent shares outstanding                  29,617          26,247          28,501       26,166
                                                  ============   ===========     ============  ============
</TABLE>

* The diluted share basis for the three and nine months ended September 30, 2001
excludes  convertible  notes,  options  and  warrants  due to their antidilutive
effect  as  a  result  of the Company's net loss from continuing operations. The
diluted  share  basis  for  the  three  and nine months ended September 30, 2002
excludes  convertible  notes  that  are  convertible  into 2.5 million shares of
common  stock  due  to  their  antidilutive  effect.

                                       13
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF  OPERATIONS

SAFE  HARBOR  FOR  FORWARD-LOOKING  STATEMENTS

     The  following  discussion  should  be  read  in  conjunction  with  the
Consolidated  Financial  Statements  included elsewhere in this Form 10-Q and in
the  Company's  Annual  Report on Form 10-K, as amended by its Form 10-K/A filed
April  12,  2002 and any subsequent filings. Certain of the statements contained
herein  may  be  considered  forward-looking  statements.  Such  statements  are
identified  by  the  use of forward-looking words or phrases, including, but not
limited  to,  "estimates,"  "expects,"  "expected,"  "anticipates,"  and
"anticipated."  These  forward-looking  statements  are  based  on the Company's
current  expectations.  Although  the  Company  believes  that  the expectations
reflected  in  such  forward-looking  statements are reasonable, there can be no
assurance  that  such  expectations  will  prove  to  have  been  correct.

     Forward-looking  statements  involve  risks  and  uncertainties  and  the
Company's  actual  results  could  differ  materially  from  the  Company's
expectations. In addition to those factors discussed elsewhere in this Form 10-Q
(see  particularly  Note  1(b)  of  the  Notes  to  the  Consolidated  Financial
Statements)  and  the  Company's  other filings with the Securities and Exchange
Commission,  important  factors  that  could cause such actual results to differ
materially  include,  among  others,  dependence  on  the  availability  and
functionality of incumbent local telephone companies' networks as they relate to
the  unbundled  network  element  platform, increased price competition for long
distance and local services, failure of the marketing of the bundle of local and
long  distance services and long distance services under its agreements with its
direct  marketing channels and its various marketing partners, failure to manage
the  nonpayment  of  amounts due the Company from its customers from bundled and
long  distance  services,  attrition  in  the  number  of  end-users, failure or
difficulties  in  managing  the  Company's  operations, including attracting and
retaining  qualified  personnel, failure of the Company to be able to expand its
active offering of local bundled services in a greater number of states, failure
to  provide timely and accurate billing information to customers, failure of the
Company  to  manage  its  collection  management systems and credit controls for
customers,  interruption  in  the  Company's  network  and  information systems,
failure  of  the  Company  to  provide  adequate customer service and changes in
government  policy,  regulation  and  enforcement  and/or  adverse  judicial
interpretations and rulings relating to such regulations and enforcement. Except
as otherwise required by law, the Company undertakes no obligation to update its
forward-looking  statements.

OVERVIEW

     Talk  America  Holdings,  Inc.,  through  its subsidiaries (the "Company"),
provides  local  and long distance telecommunication services to residential and
small business customers throughout the United States. The Company has developed
integrated  order  processing,  provisioning,  billing,  payment,  collection,
customer  service  and  information systems that enable the Company to offer and
deliver  high-quality,  competitively  priced  telecommunication  services  to
customers.

     The  Company's  telecommunication  services offerings primarily include the
bundled  service  offering  of local and long distance voice services, which are
billed  to customers in one combined invoice. Local phone services include local
dial tone, local calling plans that include free member-to-member calling, and a
variety  of  features  such as caller identification, call waiting and three-way
calling.  Long  distance  phone  services  include traditional 1+ long distance,
international  and calling cards. The Company uses the unbundled network element
platform ("UNE-P") of the incumbent local exchange carriers ("ILECs") network to
provide  local  services  and  the  Company's nationwide network and third party
international  call  termination  to  provide long distance services. The FCC is
currently undertaking its triennial review of local phone competition, including
the  continued  availability of certain unbundled network elements and switching
(see "Liquidity and Capital Resources, Other Matters"). The Company attracts new
customers through referral programs, direct marketing programs, agent and direct
sales,  and  online  partners.

                                       14
<PAGE>

RESULTS  OF  OPERATIONS

     The  following table sets forth for the periods indicated certain financial
data  of  the  Company  as  a  percentage  of  sales:

<TABLE>
<CAPTION>

                                            FOR THE THREE MONTHS          FOR THE NINE MONTHS
                                             ENDED SEPTEMBER 30,          ENDED SEPTEMBER 30,
                                          ------------------------      ------------------------
                                             2002          2001           2002           2001
                                          ----------    ----------      ----------    ----------
<S>                                          <C>           <C>            <C>             <C>
Sales                                       100.0%        100.0%           100.0%        100.0%
Costs and expenses:
   Network and line costs                    47.8          46.4             49.0          47.9
   General and administrative expenses       15.1          16.2             17.0          16.4
   Provision for doubtful accounts            2.8          22.9              3.8          20.3
   Sales and marketing expenses               8.6           9.6              8.3          17.6
   Depreciation and amortization              5.8           8.2              5.7           7.5
   Impairment and restructuring charges        --         135.5               --          43.8
                                          ----------    ----------      ----------    ----------
      Total costs and expenses               80.1         238.8             83.8         153.5
                                          ----------    ----------      ----------    ----------
Operating income (loss)                      19.9        (138.8)            16.2         (53.5)
Other income (expense):
   Interest income                            0.4           0.2              0.2           0.3
   Interest expense                          (3.3)         (1.2)            (2.9)         (1.2)
   Other, net                                (0.1)         (2.0)            (0.4)         (0.7)
                                          ----------    ----------      ----------    ----------
Income (loss) before income taxes            16.9        (141.8)            13.1         (55.1)
Provision for income taxes                     --            --               --            --
                                          ----------    ----------      ----------    ----------
Income (loss) before extraordinary gain
   and cumulative effect of an
   accounting change                         16.9        (141.8)            13.1         (55.1)
Extraordinary gain                             --          13.3               --           4.3
Cumulative effect of an accounting
   change                                      --            --               --          (9.4)
                                          ----------    ----------      ----------    ----------
Net income (loss)                            16.9%       (128.5)%           13.1%        (60.2)%
                                          ==========    ==========      ==========    ==========
</TABLE>

QUARTER  ENDED  SEPTEMBER  30, 2002 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2001

     Sales.  Sales  decreased  by  37.4%  to $79.1 million for the quarter ended
September 30, 2002 from $126.3 million for the quarter ended September 30, 2001,
but  have  increased  1.9% sequentially from $77.7 million for the quarter ended
June  30,  2002.

     The  Company's  long  distance  sales  decreased  to  $34.6 million for the
quarter  ended  September  30,  2002  from  $69.4  million for the quarter ended
September  30, 2001, and have decreased 9.6% sequentially from $38.3 million for
the  quarter  ended  June  30,  2002.  A significant percentage of the Company's
revenues  were derived from long distance telecommunication services provided to
customers  who  were  obtained  under the AOL marketing agreement. The Company's
decision  to  focus  on  the  bundled product and the discontinuation of the AOL
marketing  relationship  effective  September  30,  2001, together with customer
turnover,  contributed  to  the decline in long distance customers and revenues.
This  decline in long distance customers and revenues is expected to continue so
long  as  the  Company  continues  to focus its marketing efforts on the bundled
product.  Long  distance  revenues  for the quarter ended September 30, 2002 and
September  30,  2001  included non-cash amortization of deferred revenue of $1.9
million  related to a telecommunications service agreement entered into in 1997.
Deferred  revenue relating to this agreement has been amortized over a five-year
period.  The  agreement  and  related  amortization  terminated in October 2002.
Long distance revenues are expected to decline to between $27 and $32 million in
the fourth quarter of 2002 and for the full year 2003 are expected to be between
$80  and  $90  million.

     The  Company's  bundled sales for the quarter ended September 30, 2002 were
$44.5  million  compared  with $56.9 million for the quarter ended September 30,
2001,  but  have increased 13.1% sequentially from $39.4 million for the quarter
ended  June  30, 2002. The Company had approximately 276,000 bundled lines as of

                                       15
<PAGE>

September  30,  2002  compared  with  244,000  bundled  lines  at June 30, 2002.
Approximately  150,000  of  the  bundled  lines  at  September  30,  2002  and
approximately  71%  of  the Company's new bundled lines for the third quarter of
2002  were  in  Michigan.  The decrease in bundled sales in the third quarter of
2002  compared to 2001 reflects the Company's decision to slow growth in bundled
sales  while  the  Company  pursued its plans to improve the efficiencies of the
Company's  bundled  business  model and improve customer quality and collections
processes. The increase in bundled revenues sequentially from the second quarter
of  2002  to  the third quarter of 2002 is attributed to growth in bundled lines
and  reductions in customer turnover.  In the third quarter of 2002, agent sales
slowed  due  to  implementation issues associated with the Company's new product
offerings  in the previous quarter. Bundled revenues are expected to increase to
between  $48 and $53 million in the fourth quarter of 2002. Bundled revenues for
the  full  year  2003  are  expected  to  be  between  $270  and  $280  million.
Longer-term  growth  in  revenues  will  depend  upon  continued  operating
efficiencies,  lower  customer turnover and the Company's ability to develop and
scale  various marketing programs in other states. Revenues per bundled line are
expected  to  decline  in  the  future  as the Company continues to market lower
priced  products  to  be  more  competitive with incumbent and other competitive
local  exchange  carriers  and  provide  greater  value  to  its  customers.

     Network  and Line Costs. Network and line costs decreased by 35.6% to $37.8
million  for  the  quarter  ended  September 30, 2002 from $58.7 million for the
quarter  ended  September  30,  2001. The decrease in network and line costs was
primarily  due  to  a  lower  number  of  local  and  long distance customers, a
reduction  in  access and usage charges and a reduction in primary interexchange
carrier charges. Network and line costs for the three months ended September 30,
2002  benefited  from  a  credit  of  $0.4 million in connection with a New York
Public Service Commission-mandated refund from Verizon New York of certain UNE-P
switching  costs  totaling  an  aggregate  $1.6 million. Of the Verizon New York
refund,  $1.2 million was received in the second and third quarters of 2002. The
remaining balance of the credit, an additional $0.4 million, will be provided to
the  Company  in  the  form  of bill credits from Verizon over the quarter ended
December  31,  2002.  Network  and  line  costs  also  benefited  from favorable
resolution  of  disputes  with  vendors.  The  Company's policy is not to record
credits from such disputes until received. As a percentage of sales, network and
line  costs  increased  to  47.8%  for  the quarter ended September 30, 2002, as
compared  to  46.4%  for  the  same  quarter  last  year.  The  FCC is currently
undertaking  its  triennial  review  of  local  phone competition, including the
continued  availability  of certain unbundled network elements and switching. As
the Company's long distance customer base declines, the Company could be subject
to  higher  network  and line costs as percentage of sales due to fixed costs of
the  Company's  long  distance network and certain minimum contract commitments.
See  "Liquidity  and  Capital  Resources,  Other  Matters."

     Gross  profit,  defined  as sales less network and line costs, decreased by
38.9%  for  the  quarter  ended  September  30, 2002 to $41.3 million from $67.7
million  for  the  same  quarter  last  year, and gross margin, defined as gross
profit as a percentage of sales, decreased to 52.2% as compared to 53.6% for the
quarter ended September 30, 2001. Gross margin for the long distance product was
60.8%  for  the  third quarter of 2002 as compared to 59.1% for the same quarter
last  year  and  gross  margin  for  the bundled product was 45.6% for the third
quarter of 2002 as compared to 46.7% for the same quarter last year.  The growth
of  local  bundled  service as a percentage of total revenue and product mix has
contributed  to  the decrease in overall gross margin.  Excluding the benefit of
the  Verizon New York credit and other dispute resolutions, the gross margin for
the  bundled  product  would  have  been  in  the  low  40%  range.  Excluding
amortization  of  deferred  revenue  related  to  a  telecommunications  service
agreement,  which expired in October 2002 and various dispute resolutions, gross
margin  for the long distance product would have been in the low 50% range.  The
FCC is currently considering modifications to the Universal Service Fund ("USF")
program  that  may  go  into effect as early as the end of 2002.  Changes to the
methodology used in the calculation of the collection and payment of USF charges
may  have  an  adverse  impact  on  the  Company's  gross  margin.

     General  and  Administrative  Expenses. General and administrative expenses
decreased  by  41.8%  to  $12.0 million for the quarter ended September 30, 2002
from  $20.5  million  for  the  quarter  ended  September  30, 2001. The overall
decrease in general and administrative expenses was due primarily to significant
workforce reductions and other cost cutting efforts by the Company as it pursued
improvements  in operating efficiencies of the Company's bundled business model.
Included  in general and administrative expenses for the quarter ended September
30,  2002  was  a  non-cash  credit of $1.7 million related to a favorable legal
settlement  of  a  dispute  that  had  previously been reflected as a liability,
partially  offset  by  an  increase in legal reserves of $0.5 million. While the
Company  expects  to  realize  further  general  and  administrative  expense
efficiencies  as  the customer base grows, realization of such efficiencies will
be  dependant  on  the ability of management to control personnel costs in areas
such  as  collections  and customer service. There can be no assurances that the
Company  will  be  able  to  realize  these  efficiencies.


                                       16
<PAGE>

     Provision  for Doubtful Accounts. Provision for doubtful accounts decreased
by  92.4%  to  $2.2  million for the quarter ended September 30, 2002 from $28.9
million  for the same quarter last year and, as a percentage of sales, decreased
to  2.8%  as  compared  to  22.9%  for the quarter ended September 30, 2001. The
Company  had taken several steps during the third and fourth quarters of 2001 to
reduce bad debt expense, improve the overall credit quality of its customer base
and  improve  its collections of past due amounts. The benefits of the Company's
actions to reduce bad debt expense and improve the overall credit quality of its
customer  base are reflected in the lower bad debt expense for the quarter ended
September  30,  2002. Further, the provision for doubtful accounts for the third
quarter  of  2002 reflects a benefit from a reversal of the reserve for doubtful
accounts  of  $0.7  million.  In general, the Company believes that the bad debt
expense  as  a  percentage  of sales of the Company's long distance customers is
lower  than  that  of  its  bundled  customers because of the relatively greater
maturity  of  the  long  distance  customer  base.

     Sales  and Marketing Expenses. During the quarter ended September 30, 2002,
the Company incurred $6.8 million of sales and marketing expenses as compared to
$12.1  million  for  the  same  quarter  last  year, a 43.7% decrease, and, as a
percentage  of  sales,  a  decrease  to 8.6% as compared to 9.6% for the quarter
ended  September 30, 2001.  The decrease from the third quarter of 2002 compared
to 2001 is primarily attributable to the reduction in marketing fees paid to AOL
due  to  the  termination  of  the  marketing  relationship  with  AOL effective
September 30, 2001. Sales and marketing expenses declined further as the Company
slowed  growth  as  it pursued its plan to improve efficiencies of the Company's
bundled business model.  Currently, substantially all of the sales and marketing
expenses  relate  to  the  bundled  product.  Sales  and  marketing expenses are
expected  to  increase in the fourth quarter of 2002 as the Company continues to
target  growth  in  the  bundled  product  and  invest in the development of its
marketing  programs.

     Depreciation  and  Amortization.  Depreciation  and  amortization  for  the
quarter  ended  September  30, 2002 was $4.6 million, a decrease of $5.7 million
compared  to  $10.3  million for the quarter ended September 30, 2001, and, as a
percentage of sales, decreased to 5.8% as compared to 8.2% for the quarter ended
September  30,  2001. The Company's amortization expense decreased significantly
for  the  quarter  ended  September  30, 2002 due to the write-down in the third
quarter  of  2001  of  goodwill  associated  with the acquisition of Access One.
Additionally,  the  Company  implemented  Statement  of  Financial  Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," which established the
impairment  approach rather than amortization for goodwill, resulting in reduced
amortization  in  2002  (See  Note  1  of  the  Notes  to Consolidated Financial
Statements).

     Impairment  and  Restructuring Charges. The Company incurred impairment and
restructuring  charges  of  $171.2  million  for the quarter ended September 30,
2001.  Included  in  the  amount for the quarter ended September 30, 2001 was an
impairment  charge  of  $168.7  million,  primarily related to the write-down of
goodwill  associated  with the acquisition of Access One, as discussed above. In
September  2001,  the  Company approved a plan to close one of its a call center
operations.  The  Company recorded a charge of $2.5 million in the quarter ended
September 30, 2001 to reflect the elimination of approximately 225 positions and
lease  exit  costs  in  connection  with  the call center closure. There were no
impairment  or restructuring charges in the third quarter of 2002 (see Note 6 of
the  Notes  of  the  Consolidated  Financial  Statements).

     Interest  Income.  Interest  income  was $0.3 million for the quarter ended
September 30, 2002 versus $0.3 million for the quarter ended September 30, 2001.

     Interest  Expense.  Interest expense was $2.6 million for the quarter ended
September  30,  2002 as compared to $1.5 million for the quarter ended September
30, 2001. The increase in interest expense is attributed to higher yielding debt
instruments  associated  with  the exchange of the Company's 4 1/2% and 5% Notes
for 8% and 12% Notes and the restructuring of the MCG credit facility (see Notes
2,  3 and 5 of the Notes to Consolidated Financial Statements and "Liquidity and
Capital  Resources").  As  described  in  Note  3  of  the Notes to Consolidated
Financial  Statements,  the  issuance  of  the 8% convertible notes due 2011 was
accounted  for  as  a troubled debt restructuring and, as such, interest expense
associated  with  these  notes  would  not  be recorded in future periods in the
Company's  statements  of operations.  For the quarter ended September 30, 2002,
$0.7 million of interest expense associated with the issuance of these notes was
not  reflected  in  net  income. Interest expense is expected to decrease in the

                                       17
<PAGE>

fourth quarter of 2002 as compared to the third quarter of 2002 due to the early
retirement  of  the  Company's senior credit facility and the retirement of $3.9
million  of  the  4  1/2%  Notes.

     Other,  Net.  Net  other  expenses  were $0.1 million for the quarter ended
September  30,  2002 as compared to $2.5 million for the quarter ended September
30, 2001. The amount for the quarter ended September 30, 2001 primarily consists
of  a  $2.4  million  unrealized  loss  on the increase in fair value of the AOL
contingent  redemptions  in  accordance with the fair value accounting treatment
under  EITF Abstract No. 00-19. This amount did not recur, as the AOL contingent
redemptions  had  been  restructured  effective  September  2001.

     Provision  for  Income  Taxes.  At  September  30,  2002  and  2001, a full
valuation  allowance  has been provided against the Company's net operating loss
carryforwards and other deferred tax assets. Since the amounts and extent of the
Company's  future  earnings  are  not  determinable  with a sufficient degree of
probability  to  recognize  the  deferred  tax  assets  in  accordance  with the
requirements of Statement of Financial Accounting Standards No. 109, "Accounting
for  Income  Taxes,"  the Company has recorded a full valuation allowance on the
net  deferred tax assets. For the quarter ended September 30, 2002, although the
Company  has net income, no provision for income taxes has been reflected on the
statement of operations due to the full valuation allowance. The Company has not
recorded  any  income tax expense or benefit for the quarter ended September 30,
2001  because  the  Company  incurred  losses  during  this  period  as  well as
maintained  a  full valuation allowance at September 30, 2001. The third quarter
of  2002  represents  the  fourth  consecutive  quarter of profitability for the
Company.  In  the fourth quarter of 2002, as part of its 2003 budgeting process,
management  will  evaluate the valuation allowance and, if appropriate after the
evaluation, will reverse all or a portion of this valuation allowance, resulting
in  a  non-cash  deferred  income tax benefit on the statement of operations. At
that  time,  the  Company would record the estimated net realizable value of the
deferred  tax  asset and, beginning in 2003, would provide for income taxes at a
rate equal to the Company's combined federal and state effective rates. However,
to  the  extent of available net operating loss carryforwards, the Company would
be  shielded  from  paying  cash income taxes for several years. There can be no
assurances  that  the Company will realize the full benefit of the net operating
loss  carryforwards on future taxable income generated by the Company due to the
"change  of  ownership" provisions of the Internal Revenue Code Section 382 (see
"Liquidity  and  Capital  Resources,  Other  Matters").

     Extraordinary  Gain  (Loss).  The Company incurred an extraordinary gain in
the quarter ended September 30, 2001 of $16.9 million, which represents the gain
on  restructuring  of the AOL contingent redemptions in accordance with SFAS No.
15,  "Accounting  by Debtors and Creditors for Troubled Debt Restructurings," as
discussed above in Note 3 of the Notes to the Consolidated Financial Statements.
As  a  result of the retirement of the Company's senior credit facility prior to
maturity,  the  Company  will  incur  a one-time, non-cash extraordinary loss of
approximately  $1.1  million  in  the  fourth  quarter  of  2002  reflecting the
acceleration  of  the amortization of certain deferred finance charges and fees.


NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001

     Sales. Sales decreased by 39.5% to $236.3 million for the nine months ended
September  30,  2002 from $390.6 million for the nine months ended September 30,
2001.

     The  Company's long distance sales decreased to $116.9 million for the nine
months  ended  September  30, 2002 from $236.3 million for the nine months ended
September  30,  2001.  A  significant  percentage of the Company's revenues were
derived  from long distance telecommunication services provided to customers who
were obtained under the AOL marketing agreement. The Company's decision to focus
on the bundled product and the discontinuation of the AOL marketing relationship
effective  September  30,  2001, together with customer turnover, contributed to
the  decline  in  long  distance  customers  and  revenues. This decline in long
distance  customers  and revenues is expected to continue so long as the Company
continues  to  focus its marketing efforts on the bundled product. Long distance
revenues  for  the  nine  months ended September 30, 2002 and September 30, 2001
included  non-cash amortization of deferred revenue of $5.6 million related to a
telecommunications  service  agreement  entered  into in 1997.  Deferred revenue
relating  to  this  agreement  has  been amortized over a five-year period.  The
agreement  and  related  amortization  terminated  in  October  2002.

                                       18
<PAGE>

     The  Company's  bundled  sales for the nine months ended September 30, 2002
were  $119.4  million  compared  with  $154.3  million for the nine months ended
September  30,  2001.  The  decrease  in bundled sales for the nine months ended
September  30,  2002  compared  to  2001 reflects the Company's decision to slow
growth  in  bundled  sales  while  the  Company pursued its plans to improve the
efficiencies  of  the  Company's  bundled  business  model  and improve customer
quality  and  collections  processes.  In addition, a significant portion of the
bundled  sales  for the nine months ended September 30, 2001 were generated from
bundled  service  customers  acquired  through  marketing programs that had been
discontinued  in 2001. Longer-term growth in revenues will depend upon continued
operating  efficiencies,  lower  customer  turnover and the Company's ability to
develop  and  scale  various  marketing  programs  in other states. Revenues per
bundled  line  are expected to decline in the future as the Company continues to
market  lower  priced  products  to be more competitive with incumbent and other
competitive  local  exchange  carriers  and  provide greater value to consumers.

     Network and Line Costs. Network and line costs decreased by 38.1% to $115.7
million for the nine months ended September 30, 2002 from $186.9 million for the
nine months ended September 30, 2001. The decrease in costs was primarily due to
a  lower  number of local and long distance customers, a reduction in access and
usage  charges and a reduction in primary interexchange carrier charges. Network
and  line  costs for the nine months ended September 30, 2002 benefited from the
Verizon  New York credit of $1.2 million.  Network and line costs also benefited
from favorable resolution of disputes with vendors.  The Company's policy is not
to  record credits from such disputes until received.  As a percentage of sales,
network  and  line  costs increased to 49.0% for the nine months ended September
30,  2002,  as  compared  to  47.9%  for  the same period last year.  The FCC is
currently  undertaking its triennial review of local phone competition including
the  continued availability of certain unbundled network elements and switching.
As  the  Company's  long  distance  customer base declines, the Company could be
subject  to  higher network and line costs as a percentage of sales due to fixed
costs  of  the  Company's  long  distance  network  and certain minimum contract
commitments.  See  "Liquidity  and  Capital  Resources,  Other  Matters."

     Gross  profit,  defined  as sales less network and line costs, decreased by
40.8% for the nine months ended September 30, 2002 to $120.6 million from $203.7
million for the same period last year, and gross margin, defined as gross profit
as  a  percentage of sales, decreased to 51.0% as compared to 52.1% for the nine
months  ended September 30, 2001. Gross margin for the long distance product was
59.1%  for  the  nine months ended September 30, 2002 as compared with 55.9% for
the same period last year and gross margin for the bundled product was 43.1% for
the  nine  months  ended  September  30,  2002 as compared to 46.5% for the same
period  last year.  The growth of local bundled service as a percentage of total
revenue and product mix has contributed to the decrease in overall gross margin.

     General  and  Administrative  Expenses. General and administrative expenses
decreased by 37.5% to $40.2 million for the nine months ended September 30, 2002
from  $64.2  million  for  the nine months ended September 30, 2001. The overall
decrease in general and administrative expenses was due primarily to significant
workforce reductions and other cost cutting efforts by the Company as it pursued
improvements  in operating efficiencies of the Company's bundled business model.
The  Company  had  increased  personnel  costs  associated  with  supporting the
Company's  bundled  services offerings, including customer service, provisioning
and  collections  personnel  during  the nine months ended September 30, 2001 as
compared with 2002. Included in general and administrative expenses for the nine
months ended September 30, 2002 was a non-cash credit of $1.7 million related to
a favorable settlement of a vendor dispute that had previously been reflected as
a  liability, partially offset by an increase in legal reserves of $0.5 million.
While  the Company expects to realize further general and administrative expense
efficiencies  as  the customer base grows, realization of such efficiencies will
be  dependant  on  the ability of management to control personnel costs in areas
such  as  collections  and customer service. There can be no assurances that the
Company  will  be  able  to  realize  these  efficiencies.


     Provision  for Doubtful Accounts. Provision for doubtful accounts decreased
by 88.7% to $9.0 million for the nine months ended September 30, 2002 from $79.4
million  for  the same period last year and, as a percentage of sales, decreased
to  3.8%  as compared to 20.3% for the nine months ended September 30, 2001. The
Company  had taken several steps during the third and fourth quarters of 2001 to
reduce bad debt expense, improve the overall credit quality of its customer base
and  improve  its collections of past due amounts. The benefits of the Company's
actions to reduce bad debt expense and improve the overall credit quality of its
customer  base  are  reflected in the lower bad debt expense for the nine months

                                       19
<PAGE>

ended  September  30, 2002. Further, the provision for doubtful accounts for the
nine  months  ended September 30, 2002 reflects a benefit from a reversal of the
reserve  for doubtful accounts of $2.2 million. In general, the Company believes
that  the  bad  debt  expense  as  a  percentage  of sales of the Company's long
distance  customers  is  lower than that of its bundled customers because of the
relatively  greater  maturity  of  the  long  distance  customer  base.

     Sales  and  Marketing  Expenses. During the nine months ended September 30,
2002,  the  Company  incurred  $19.6  million of sales and marketing expenses as
compared  to $68.6 million for the same period last year, a 71.4% decrease, and,
as  a  percentage of sales, a decrease to 8.3% as compared to 17.6% for the nine
months  ended September 30, 2001. The decrease in 2002 is primarily attributable
to  the  reduction  in  marketing fees paid to AOL due to the termination of the
marketing  relationship  with  AOL  effective  September  30,  2001.  Sales  and
marketing  expenses  declined further as the Company slowed growth as it pursued
its  plan  to  improve  efficiencies  of  the  Company's bundled business model.
Currently,  substantially  all of the sales and marketing expenses relate to the
bundled  product.

     Depreciation  and  Amortization. Depreciation and amortization for the nine
months  ended  September 30, 2002 was $13.5 million, a decrease of $15.8 million
compared  to $29.3 million for the nine months ended September 30, 2001, and, as
a percentage of sales, decreased to 5.7% as compared to 7.5% for the nine months
ended  September  30,  2001.  The  Company's  amortization  expense  decreased
significantly for the nine months ended September 30, 2002 due to the write-down
in  the  third  quarter  of  2001 of goodwill associated with the acquisition of
Access  One.  Additionally,  the  Company  implemented  Statement  of  Financial
Accounting  Standards  No.  142,  "Goodwill  and Other Intangible Assets," which
established  the  impairment  approach  rather  than  amortization for goodwill,
resulting  in  reduced amortization for the nine months ended September 30, 2002
(see  Note  1  of  the  Notes  to  the  Consolidated  Financial  Statements).

     Impairment  and  Restructuring Charges. The Company incurred impairment and
restructuring  charges of $171.2 million for the nine months ended September 30,
2001. Included in the amount for the nine months ended September 30, 2001 was an
impairment  charge  of  $168.7  million,  primarily related to the write-down of
goodwill  associated  with the acquisition of Access One, as discussed above. In
September  2001,  the  Company  approved  a plan to close one of its call center
operations.  The  Company  recorded  a charge of $2.5 million in the nine months
ended  September  30,  2001  to  reflect  the  elimination  of approximately 225
positions and lease exit costs in connection with the call center closure. There
were  no  impairment or restructuring charges in the nine months ended September
30,  2002  (see  Note  6 to the Notes of the Consolidated Financial Statements).

     Interest  Income.  Interest  income  was  $0.5  for  the  nine months ended
September  30,  2002 versus $1.1 million for the nine months ended September 30,
2001. Interest income for the nine months ended September 30, 2002 was lower due
to decrease in interest rates during the nine months ended September 30, 2002 as
compared to 2001, partially offset by the Company's higher average cash balances
in  2002  as  compared  to  2001.

     Interest  Expense.  Interest  expense  was $6.9 million for the nine months
ended  September  30, 2002 as compared to $4.6 million for the nine months ended
September  30,  2001.  The  increase in interest expense is attributed to higher
yielding  debt  instruments associated with the exchange of the Company's 4 1/2%
and 5% Notes for 8% and 12% Notes and the MCG credit facility restructuring (see
Notes  2,  3  and  5  of  the  Notes  to  Consolidated  Financial Statements and
"Liquidity  and  Capital Resources"). In addition, interest expense for the nine
months  ended  September  30,  2002 includes the write-off of deferred financing
costs  of  $0.4 million in connection with the bond restructuring.  As described
in Note 3 of the Notes to Consolidated Financial Statements, the issuance of the
8% convertible notes due 2011 was accounted for as a troubled debt restructuring
and, as such, interest expense associated with these notes would not be recorded
in  future  periods  in  the  Company's  statements of operations.  For the nine
months  ended  September  30,  2002, $2.0 million of interest expense associated
with  the  issuance  of  these  notes  was  not  reflected  in  net  income.

     Other,  Net.  Net  other  expenses  were  $0.9  for  the  nine months ended
September  30,  2002  as  compared  to  $2.6  million  for the nine months ended
September  30,  2001.  The  amount  for the nine months ended September 30, 2002
primarily  consists  of  costs in connection with the Company's restructuring of
its  convertible  subordinated  notes  (see  Note 2 of the Notes to Consolidated
Financial  Statements).  The amount for the nine months ended September 30, 2001
primarily  consists  of  a  $2.4 million unrealized loss on the increase in fair

                                       20
<PAGE>

value  of  the  AOL  contingent  redemptions  in  accordance with the fair value
accounting  treatment  under  EITF  Abstract  No.  00-19.  This  amount  was not
recurring,  as  the  AOL  contingent redemptions had been restructured effective
September  2001.

     Provision  for  Income  Taxes.  At  September  30,  2002  and  2001, a full
valuation  allowance  has been provided against the Company's net operating loss
carryforwards and other deferred tax assets. Since the amounts and extent of the
Company's  future  earnings  are  not  determinable  with a sufficient degree of
probability  to  recognize  the  deferred  tax  assets  in  accordance  with the
requirements of Statement of Financial Accounting Standards No. 109, "Accounting
for  Income  Taxes,"  the Company has recorded a full valuation allowance on the
net  deferred tax assets. For the nine months ended September 30, 2002, although
the  Company has net income, no provision for income taxes has been reflected on
the statement of operations due to the full valuation allowance. The Company has
not  recorded  any  income  tax  expense  or  benefit  for the nine months ended
September  30,  2001  because  the Company incurred losses during this period as
well  as  maintained a full valuation allowance at September 30, 2001. The third
quarter  of  2002 represents the fourth consecutive quarter of profitability for
the  Company.  In  the  fourth  quarter  of  2002, as part of its 2003 budgeting
process,  management  will  evaluate the valuation allowance and, if appropriate
after the evaluation, will reverse all or a portion of this valuation allowance,
resulting  in  a  non-cash  deferred  income  tax  benefit  on  the statement of
operations.  At that time, the Company would record the estimated net realizable
value of the deferred tax asset and, beginning in 2003, would provide for income
taxes  at  a  rate  equal  to the Company's combined federal and state effective
rates. However, to the extent of available net operating loss carryforwards, the
Company would be shielded from paying cash income taxes for several years. There
can  be  no assurances that the Company will realize the full benefit of the net
operating  loss  carryforwards on future taxable income generated by the Company
due to the "change of ownership" provisions of the Internal Revenue Code Section
382  (see  "Liquidity  and  Capital  Resources,  Other  Matters").


     Extraordinary  Gain. The Company incurred an extraordinary gain in the nine
months  ended  September 30, 2001 of $16.9 million, which represents the gain on
restructuring  of the AOL contingent redemptions in accordance with SFAS No. 15,
"Accounting  by  Debtors  and  Creditors  for  Troubled Debt Restructurings," as
discussed above in Note 2 of the Notes to the Consolidated Financial Statements.

     Cumulative  Effect  of  an  Accounting Change. The Company adopted Emerging
Issues  Task  Force  Abstract  No.  00-19,  "Accounting for Derivative Financial
Instruments  Indexed  to, and Potentially Settled in, a Company's Own Stock," in
the  nine months ended September 30, 2001. The cumulative effect of the adoption
of  this  change  in  accounting  principle  resulted  in  a  non-cash charge to
operations  of  $36.8  million  in  the  nine  months  ended September 30, 2001,
representing  the  change  in  fair  value  of contingent redemption features of
warrants  and  common stock held by AOL from issuance on January 5, 1999 through
June  30,  2001.

                                       21
<PAGE>

LIQUIDITY  AND  CAPITAL  RESOURCES

     The  Company's  cash  requirements  arise  primarily from the subsidiaries'
operational  needs, the subsidiaries' capital expenditures, and the debt service
obligations  of  the  subsidiaries and of Talk America Holdings, Inc. Since Talk
America  Holdings, Inc. conducts all of its operations through its subsidiaries,
primarily  Talk  America  Inc.,  it relies on dividends, distributions and other
payments  from  its  subsidiaries  to  fund  its  obligations.

     Contractual  obligations  of  the  Company  as  of  September  30, 2002 are
summarized  by  years  to  maturity  as  follows  (in  thousands):

<TABLE>
<CAPTION>
                                                        1 year or       2 - 3        4 - 5
Contractual Obligations (4)                   Total       less          Years        Years      Thereafter
------------------------------------------  ---------   ----------   ----------   ----------   ------------
<S>                                           <C>        <C>             <C>          <C>          <C>
Talk America Holdings, Inc.:
----------------------------
   8% Convertible notes due 2011(1)          $ 64,487    $ 1,384       $ 2,941     $ 3,182       $ 56,980
   12% Senior subordinated notes due 2007      71,681         --            --      71,681             --
   8% Convertible senior subordinated
      notes due 2007 (2)                        4,103         --            --       4,103             --
   5% Convertible subordinated notes due
      2004                                        670         --           670          --             --

Talk America Inc. and other subsidiaries:
------------------------------------------
   Senior credit facility (3)                  13,750     13,750            --          --             --
   Capital lease obligations                      101         60            41          --             --
   Other long-term obligations                     63         63            --          --             --
                                            ---------   ----------   ----------   ----------   ------------
Total Contractual Obligations               $ 154,855    $15,257       $ 3,652     $78,966       $ 56,980
                                            =========   ==========   ==========   ==========   ============
</TABLE>
------------------

(1)  The  2011  Convertible  Notes  include $34.3 million of principal and $30.2
million  of  future  accrued  interest  (see Note 3 of the Notes to Consolidated
Financial  Statements).  The  2011  Convertible  Notes  are subject to mandatory
redemption, at the option of the holder, in September 2006 and September 2008 at
par  plus  accrued  interest.

(2)  The  8%  Notes include $2.8 million of principal and $1.3 million of future
accrued interest (see Note 2 of the Notes to Consolidated Financial Statements).

(3) On October 4, 2002, the principal operating subsidiaries of Company retired,
prior  to  maturity,  all  of the debt outstanding under the MCG Credit Facility
Agreement.

(4)  Excluded from these contractual obligations are operating lease obligations
and  network service obligations.  The Company leases office space and equipment
under  operating  lease  agreements.  Certain leases contain renewal options and
purchase  options,  and  generally  provide  that  the  Company  shall  pay  for
insurance,  taxes  and  maintenance.  As  of  December 31, 2001, the Company had
future  minimum  annual  lease obligations under noncancellable operating leases
with  terms  in  excess of one year as follows: 2002 - $1.8 million, 2003 - $1.7
million,  2004 - $1.4 million, 2005 - $0.9 million, 2006 - $0.4 million and 2007
and  thereafter  -  $0.3  million.  The Company is also party to various network
service agreements, which contain certain minimum usage commitments. The largest
contract  establishes  pricing  and provides for annual minimum payments for the
years  ended December 31, as follows: 2002 - $22.2 million, 2003 - $22.8 million
and  2004  -  $27.9  million.  A  separate  contract  with  a  different  vendor
establishes pricing and provides for annual minimum payments for the years ended
December  31,  as  follows:  2002 - $3.0 million, 2003 - $6.0 million and 2004 -
$3.0  million.  As  a  consequence of these minimum network service obligations,
unless  the  Company  can  re-price  or  restructure these obligations or obtain
additional  minutes  of usage from the wholesale or other long distance markets,
of which there can be no assurances that the Company will be able to accomplish,
the  Company  will  experience  an  increase  in  per  minute  network  costs.

     The  Company  relies  on  cash  generated from operations and cash and cash
equivalents  on hand to fund its capital and financing requirements. The Company
had  $41.1  million  of  cash and cash equivalents as of September 30, 2002, and
$22.1  million  as  of  December  31,  2001.

                                       22
<PAGE>

     Net  cash  provided  by operating activities was $35.2 million for the nine
months  ended  September  30,  2002  compared  to  net  cash  used  in operating
activities of $8.1 million for the nine months ended September 30, 2001. For the
nine  months  ended  September  30, 2002, the major contributors to the net cash
provided  by  operating  activities  were  the  net  income of $30.9 million and
non-cash  charges  of  $22.1  million,  primarily  consisting  of  provision for
doubtful  accounts  of  $9.0  million and depreciation and amortization of $13.5
million. These amounts were offset by an increase in accounts receivable of $6.0
million and a decrease in accounts payable of $13.3 million. For the nine months
ended  September  30, 2001, the net cash used in operating activities was mainly
generated  by the net loss of $235.1 million, an increase in accounts receivable
of  $68.2  million,  a decrease in accounts payable and accrued expenses of $7.6
million  and  a  non-cash  extraordinary  gain  on  restructuring  of contingent
redemptions  of $16.9 million, offset by non-cash charges of $319.3 million. The
non-cash  items  primarily consisted of provision for doubtful accounts of $79.4
million,  depreciation  and  amortization  of  $29.3  million,  impairment  and
restructuring  charges  of  $171.2  million  and  the  cumulative  effect  of an
accounting  change  for  contingent  redemptions  of  $36.8  million.

     Net  cash  used  in  investing  activities was $4.8 million during the nine
months  ended  September  30,  2002,  which  consisted  of  capitalized software
development  costs  of $1.8 million and capital expenditures for the purchase of
equipment  of  $3.0  million.  Net  cash  used  in investing activities was $3.6
million  during  the  nine  months  ended  September  30,  2001, which primarily
consisted  of capitalized software development costs of $0.7 million and capital
expenditures  for  the  purchase  of  equipment  of  $2.8  million.

     Net  cash  used  in  investing activities was $1.5 million during the three
months  ended  September  30,  2002,  which  consisted  of  capitalized software
development  costs  of $0.6 million and capital expenditures for the purchase of
equipment  of $0.9 million.  The Company anticipates incurring for the full year
2002  capital  expenditures of approximately $4 million and capitalized software
development  costs  of approximately $2.5 million.  The Company expects to incur
capital  expenditures  of  between  $8  million  and $10 million and capitalized
software  development  costs  of  between  $2  million  and  $3 million in 2003,
including  approximately  $5.5 million of networking equipment and software. The
FCC  is  currently  undertaking  its triennial review of local phone competition
including  the  continued availability of certain unbundled network elements and
switching  (see  "Liquidity  and  Capital  Resources,  Other  Matters").

     Net  cash  used in financing activities for the nine months ended September
30,  2002  was  $11.4 million compared to $4.9 million for the nine months ended
September  30,  2001.  The  net  cash  used in financing activities for the nine
months  ended  September  30,  2002  was  primarily  attributable  to payment of
borrowings  under the Company's Senior Credit Facility of $3.8 million, payments
related  to  the  maturity  the  remaining $3.9 million principal balance of its
outstanding  4  1/2%  Notes, payments under its 8% Convertible notes due 2011 of
$1.9 million, payments in connection with exchange of the Company's 4 1/2% Notes
for  8%  Notes  of  $0.5 million and payments under capital lease obligations of
$1.0  million.  The  cash used in financing activities for the nine months ended
September  30,  2001  of  $4.9  million  was  primarily attributed to payment of
borrowings  under  the Company's credit facility of $1.3 million and payments in
connection  with  the  restructuring  of  the AOL contingent redemptions of $3.5
million.  On  October  4,  2002, the principal operating subsidiaries of Company
retired,  prior  to  maturity,  all of the debt outstanding under the MCG Credit
Facility  Agreement  of  $13.8  million.

     For  the  three  months  ended September 30, 2002, $1.7 million of interest
expense was recorded as additional principal on the 12% Notes and 8% Convertible
Notes  due  2011  due  to  payment  of  interest  in  kind  rather  than  cash.

     The  Company  generally does not have a significant concentration of credit
risk  with  respect to net trade accounts receivable, due to the large number of
end-users  comprising  the  Company's  customer  base.

CONVERTIBLE  SUBORDINATED  NOTES AND EXCHANGE OFFERS (see Note 2 of the Notes to
Consolidated  Financial  Statements)

     Effective  April  4,  2002,  the  Company  completed  the exchange of $57.9
million  of  the  $61.8  million  outstanding  principal  balance  of its 4 1/2%
Convertible  Subordinated  Notes  that  mature  on September 15, 2002 into $53.2

                                       23
<PAGE>

million  of  new 12% Senior Subordinated PIK Notes due August 2007 ("12% Notes")
and $2.8 million of new 8% Convertible Senior Subordinated Notes due August 2007
and  cash paid of $0.5 million. In addition, the Company exchanged $17.4 million
of  the  $18.1  million  outstanding  principal  balance  of  its 5% Convertible
Subordinated  Notes  that  mature on December 15, 2004 into $17.4 million of the
new  12%  Notes.

     The  Company  paid at maturity the remaining $3.9 million principal balance
of  its  outstanding  4  1/2% Convertible Subordinated Notes due September 2002.

AOL  AGREEMENTS  (see  Note 3 of the Notes to Consolidated Financial Statements)

     On  September  19, 2001, the Company restructured its financial obligations
with  AOL  that  arose  under  the  1999 Investment Agreement and also ended its
marketing  relationship  with AOL effective September 30, 2001 (collectively the
"AOL  Restructuring"). In connection with the AOL Restructuring, the Company and
AOL entered into a Restructuring and Note Agreement ("Restructuring Agreement"),
pursuant  to  which  the Company had outstanding as of September 30, 2002, $34.3
million principal amount of its 8% secured convertible notes due September 2011.
With  the  issuance  of additional shares under the Restructuring Agreement, AOL
also  held  2,400,000  shares  of  Company  common  stock.

OTHER  MATTERS

     The  Company's  provision  of  telecommunication  services  is  subject  to
government  regulation.  Changes  in  existing regulations could have a material
adverse  effect  on  the Company. The Company's local telecommunication services
are  provided  almost  exclusively  through  the  use  of ILEC Unbundled Network
Elements  ("UNE"), and it is primarily the availability of costs-based UNE rates
that  enables  the  Company  to  price  its  local  telecommunications  services
competitively.  On  December  12,  2001,  the  FCC  initiated  its so-called UNE
Triennial Review rulemaking in which it intends to review all UNEs and determine
whether  ILECs  should  continue  to be required to provide them to competitors.
Among  other  things,  the FCC has indicated that it will consider whether ILECs
should  continue  to  be  required  to  provide  the  "local  switching" UNE, an
essential  component of the UNE-P combination. Any curtailment by the FCC in the
availability  of  the  local switching UNE would materially impair the Company's
ability  to  provide  local telecommunications services, and could eliminate the
Company's  capability  to  provide  local  telecommunications  services entirely
unless  the  Company  is  able  to  utilize another technology, which may not be
available or available on economically feasible terms, or the Company purchases,
builds  and  implements  its  own  local  switching network, which would require
significant additional capital expenditures by the Company. On May 24, 2002, the
United  States  Court  of  Appeals  for  the D.C. Circuit released an opinion in
United States Telecom Association v. Federal Communications Commission remanding
to the FCC for further consideration the Unbundled Network Element Remand Order,
which  may  provide  the  FCC  with justification for significantly reducing the
unbundling  obligations  of  the  ILECs  as  part  of  the UNE Triennial Review.

     The  FCC  requires  the  Company  and  other providers of telecommunication
services  to  contribute  to  the USF, which helps to subsidize the provision of
local  telecommunication  services  and  other services to low-income consumers,
schools,  libraries, health care providers, and rural and insular areas that are
costly  to  serve.  The  FCC  is  currently considering modifications to the USF
program  that  may  go  into  effect as early as the end of 2002. Changes to the
methodology used in the calculation of the collection and payment of USF charges
may  have  an  adverse  impact  on  the  Company's  gross  margin.

     At  December  31,  2001,  the  Company  had  net  operating  loss  (NOL)
carryforwards  for  federal  income  tax  purposes of $262.8 million. Due to the
"change  of  ownership" provisions of the Internal Revenue Code Section 382, the
availability of the Company's net operating loss and credit carryforwards may be
subject  to  an  annual limitation against taxable income in future periods if a
change  of ownership of more than 50% of the value of the Company's stock should
occur  within a three-year testing period. Many of the changes that affect these
percentage  change  determinations,  such  as  changes  in  the  Company's stock
ownership,  are outside the Company's control. A more-than-50% cumulative change
in  ownership  for purposes of the Section 382 limitation occurred on August 31,
1998 and October 26, 1999. As a result of such changes, certain of the Company's
carryforwards  are limited. As of December 31, 2001, approximately $64.0 million
of  NOL  carryforwards  were not available to offset future income. In addition,
based  on  information  currently available to the Company, the Company believes
that  the change of ownership percentage was approximately 45% for the currently
applicable  three-year testing period. If, during the current three-year testing
period,  the  Company  experiences  an additional more-than-50% ownership change

                                       24
<PAGE>

under Section 382, the amount of the NOL carryforward available to offset future
taxable  income  may  be  further  and  substantially reduced. To the extent the
Company's  ability  to  use  these  net operating loss carryforwards against any
future  income  is  limited,  its  cash  flow  available for operations and debt
service  would  be  reduced.  There  can  be  no assurance that the Company will
realize  the  full  benefit  of  the  carryforwards.

     The  Company  has  provided  for a valuation allowance of approximately $80
million  for  its  net  deferred  tax assets as of September 30, 2002, primarily
related to the Company's NOL carryforwards. The third quarter of 2002 represents
the  fourth  consecutive quarter of profitability for the Company. In the fourth
quarter of 2002, as part of its 2003 budgeting process, management will evaluate
the  valuation  allowance and, if appropriate after the evaluation, will reverse
all  or  a  portion of this valuation allowance resulting in a non-cash deferred
income  tax  benefit  on  the statement of operations. At that time, the Company
would  record  the estimated net realizable value of the deferred tax asset and,
beginning  in  2003,  would  provide  for  income  taxes  at a rate equal to the
Company's  combined federal and state effective rates. However, to the extent of
available  net  operating loss carryforwards, the Company would be shielded from
paying  cash  income  taxes  for  several  years.



     The Company is a party to a number of legal actions and proceedings arising
from  the  Company's  provision and marketing of telecommunications services, as
well  as  certain  legal  actions  and regulatory investigations and enforcement
proceedings  arising  in  the  ordinary course of business. The Company believes
that  the ultimate outcome of the foregoing actions will not result in liability
that  would  have a material adverse effect on the Company's financial condition
or  results of operations. However, it is possible that, because of fluctuations
in  the Company's cash position, the timing of developments with respect to such
matters  that  require cash payments by the Company, while such payments are not
expected  to  be material to the Company's financial condition, could impair the
Company's  ability  in future interim or annual periods to continue to implement
its  business  plan,  which  could  affect  its  results of operations in future
interim  or  annual  periods.

     While  the  Company  believes  that  it  has access, albeit limited, to new
capital  in the public or private markets to fund its ongoing cash requirements,
there  can be no assurance as to the timing, amounts, terms or conditions of any
such  new  capital  or  whether  it could be obtained on terms acceptable to the
Company.  Accordingly,  the  Company  anticipates  that  its  cash  requirements
generally  must  be  met from the Company's cash-on-hand and from cash generated
from  operations.  Based  on  its  current projections for operations and having
retired  the Company's Senior Credit Facility prior to maturity and restructured
most  of  its  outstanding  convertible  notes  through the exchange offers, the
Company believes that its cash-on-hand and its cash flow from operations will be
sufficient  to  fund  its  currently contemplated capital expenditures, its debt
service obligations, including the increased interest expense of its outstanding
indebtedness,  and  the  expenses  of conducting its operations for at least the
next  twelve months. However, there can be no assurance that the Company will be
able  to  realize  its projected cash flows from operations, which is subject to
the  risks  and  uncertainties  discussed above, or that the Company will not be
required  to  consider  capital  expenditures  in  excess  of  those  currently
contemplated,  as  discussed  above.


CRITICAL  ACCOUNTING  POLICIES

     The  Company's  discussion  and  analysis  of  its  financial condition and
results  of  operations  are  based  upon  the  Company's consolidated financial
statements,  which  have  been prepared in accordance with accounting principles
generally  accepted  in  the  United  States. The preparation of these financial
statements  requires the Company to make estimates and judgments that affect the
reported  amounts  of  assets,  liabilities,  revenues and expenses, and related
disclosure  of  contingent  assets  and  liabilities.  On an on-going basis, the
Company  evaluates  its estimates, including those related to bad debt, goodwill
and  intangible  assets, income taxes, contingencies and litigation. The Company
bases  its estimates and judgments on historical experience and on various other
assumptions  that  are  believed  to  be reasonable under the circumstances, the
results  of  which form the basis for making judgments about the carrying values
of  assets  and  liabilities  that  are not readily apparent from other sources.
Actual  results  may  differ  from  these  estimates.

     Recognition  of  Revenue.  The  Company derives its revenues from local and
long  distance  phone  services,  primarily  local  services  bundled  with long
distance  services,  long  distance  services,  inbound  toll-free  service  and
dedicated  private  line  services for data transmission. The Company recognizes
revenue  from  voice,  data and other telecommunications-related services in the

                                       25
<PAGE>

period  in  which  subscribers  use the related service. Allowances for doubtful
accounts  are  maintained for estimated losses resulting from the failure of its
customers  to  make  required  payments  and  for  uncollectible  usage.

     Deferred revenue represents the unearned portion of local telecommunication
services  and  features  that  are  billed one month in advance. In addition, it
includes  the  amortization  of  a non-refundable prepayment received in 1997 in
connection  with  a  telecommunications  services  agreement entered into by the
Company.  The  payment  is  amortized  over the five-year term of the agreement,
which  expired  October 2002. The amount included in revenue was $1.9 million in
each  of the quarters ended September 30, 2002 and 2001. The remaining amount of
$0.6  million  will  be  included  in revenue during the fourth quarter of 2002.

     Allowance  for  Doubtful Accounts. The Company reviews accounts receivable,
historical  bad  debt,  and  customer  credit-worthiness through customer credit
scores,  current  economic  trends,  changes  in  customer  payment  history and
acceptance  of the Company's calling plans and fees when evaluating the adequacy
of  the  allowance  for  doubtful  accounts.  If  the financial condition of the
Company's  customers  were  to  deteriorate, resulting in an impairment of their
ability  to  make payments, additional allowances may be required. The Company's
accounts  receivable  balance  was  $23.6 million, net of allowance for doubtful
accounts  of  $12.0  million,  as  of  September  30,  2002.

     Valuation  of Long-Lived Assets and Intangible Assets with a Definite Life.
The  Company  continually  reviews  the  recoverability of the carrying value of
long-lived  assets,  including  intangibles  with a definite life for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. When such events occur, the Company compares
the  carrying  amount  of  the  assets  to the undiscounted expected future cash
flows.  Factors the Company considers important that could trigger an impairment
review  include  the  following:

     -    Significant  underperformance  relative  to  historical  or  projected
          future  operating  results
     -    Significant changes in the manner of the Company's use of the acquired
          assets  or  the  strategy  for  the  Company's  overall  business
     -    Significant  negative  industry  or  economic  trends
     -    Significant  decline  in  the  Company's  stock  price for a sustained
          period  and  market  capitalization  relative  to  net  book  value

     If  this  comparison  indicates  there  is  impairment,  the  amount of the
impairment  loss  to  be recorded is calculated by the excess of the net assets'
carrying  value  over  their  fair  value  and  is  typically  calculated  using
discounted  expected future cash flows. Management of the Company believes that,
for  the quarter ended September 30, 2002, no events or changes in circumstances
have  occurred  to  trigger  an  impairment  review.

     Goodwill.  Goodwill represents the cost in excess of net assets of acquired
companies.  Effective  January  1,  2002,  with  the  adoption  of SFAS No. 142,
goodwill (comprised of goodwill acquired in the Access One acquisition in August
2000)  will not be amortized, but rather will be tested for impairment annually,
and  will  be  tested  for impairment between annual tests if an event occurs or
circumstances  change  that  would indicate the carrying amount may be impaired.
Prior  to  January  1,  2002,  goodwill  and  intangibles  were  amortized  on a
straight-line  basis  over  periods ranging from 5 years to 15 years. Impairment
testing  for goodwill is performed at a reporting unit level. An impairment loss
would  generally  be recognized when the carrying amount of the reporting unit's
net  assets  exceeds  the  estimated  fair value of the reporting unit. Prior to
January  1, 2002, goodwill was tested for impairment in a manner consistent with
long-lived  assets  and  intangible  assets  with  a definite life.  The Company
completed the transitional assessment of goodwill under the requirements of SFAS
142  and  determined  that  the  fair  value  of  the reporting unit exceeds the
carrying  amount,  thus  the  goodwill  is  not  considered  impaired.

     Software  Development  Costs.  Direct  development  costs  associated  with
internal-use  computer  software  are  accounted for under Statement of Position
98-1,  "Accounting  for the Costs of Computer Software Developed or Obtained for
Internal  Use"  and are capitalized, including external direct costs of material
and  services  and  payroll  costs  for  employees devoting time to the software
projects.  Costs  incurred  during the preliminary project stage, as well as for
maintenance  and training, are expensed as incurred. Amortization is provided on
a  straight-line  basis over the shorter of 3 years or the estimated useful life
of  the  software.

                                       26
<PAGE>

     Income  Taxes. Income taxes are accounted for under the asset and liability
method.  Deferred  tax  assets  and liabilities are recognized for the estimated
future  tax  consequences  attributable to the differences between the financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective  tax  bases and operating loss and tax credit carryforwards. Deferred
tax  assets  and  liabilities are measured using enacted tax rates in effect for
the  year  in  which those temporary differences are expected to be recovered or
settled.

     The Company records a valuation allowance to reduce its deferred tax assets
in  an  amount  that  is  more  likely  than not to be realized. The Company has
provided  for  a  valuation  allowance  of approximately $80 million for its net
deferred tax assets as of September 30, 2002, primarily related to the Company's
NOL  carryforwards.  The third quarter of 2002 represents the fourth consecutive
quarter of profitability for the Company. In the fourth quarter 2002, as part of
its  2003  budgeting  process,  management will evaluate the valuation allowance
and,  if appropriate after the evaluation, will reverse all or a portion of this
valuation  allowance,  resulting  in  a non-cash deferred income tax benefit. At
that  time,  the  Company would record the estimated net realizable value of the
deferred  tax  asset and, beginning in 2003, would provide for income taxes at a
rate equal to the Company's combined federal and state effective rates. However,
to  the  extent of available net operating loss carryforwards, the Company would
be  shielded  from  paying  cash  income  taxes  for  several  years.

     Legal  Proceedings. The Company is a party to a number of legal actions and
proceedings  arising  from  the  Company's  provision  and  marketing  of
telecommunications  services,  as  well  as certain legal actions and regulatory
investigations  and  enforcement  proceedings  arising in the ordinary course of
business.  Management's  current estimated range of liability related to some of
the  pending litigation is based on claims for which management can estimate the
amount  and  range of loss. The Company recorded the minimum estimated liability
related  to  those  claims,  where  there  is  a  range  of loss. Because of the
uncertainties  related  to  both  the  amount and range of loss on the remaining
pending  litigation,  management  is unable to make a reasonable estimate of the
liability  that  could  result  from  an  unfavorable  outcome.  As  additional
information  becomes  available, the Company will assess the potential liability
related  to  the  Company's  pending  litigation  and revise its estimates. Such
revisions in the Company's estimates of the potential liability could materially
affect  its  results  of  operations  and  financial  position.

ITEM  3.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURE  ABOUT  MARKET  RISK

     In  the normal course of business, the financial position of the Company is
subject  to  a  variety  of  risks,  such  as the collectibility of its accounts
receivable and the realizability of the carrying values of its long-term assets.
The  Company's  long-term  obligations  consist  primarily  of its own notes and
credit  facility.  The  Company  does  not presently enter into any transactions
involving derivative financial instruments for risk management or other purposes
due  to  the  stability in interest rates in recent times and because management
does  not  consider  the  potential  impact  of  changes in interest rates to be
material.

     The  Company's  available  cash balances are invested on a short-term basis
(generally  overnight)  and,  accordingly,  are not subject to significant risks
associated  with  changes  in interest rates. Substantially all of the Company's
cash  flows  are  derived  from  its operations within the United States and the
Company  is  not  subject  to  market  risk  associated  with changes in foreign
exchange  rates.

ITEM  4.  CONTROLS  AND  PROCEDURES

     Within  the 90-day period prior to the filing of this report, an evaluation
was  carried  out  under  the  supervision  and  with  the  participation of the
Company's  management,  including  the Chief Executive Officer ("CEO") and Chief
Financial  Officer  ("CFO"),  of  the  effectiveness of the Company's disclosure
controls  and  procedures.  Based  on  that  evaluation,  the  CEO  and CFO have
concluded that the Company's disclosure controls and procedures are effective to
ensure  that information required to be disclosed by the Company in reports that
it  files  or  submits  under  the  Securities Exchange Act of 1934 is recorded,
processed,  summarized  and  reported  within  the  time  periods  specified  in
Securities  and  Exchange Commission rules and forms.  Subsequent to the date of
their  evaluation,  there  were no significant changes in the Company's internal
controls  or  in  other  factors  that could significantly affect the disclosure
controls,  including  any  corrective  actions  with  regard  to  significant
deficiencies  and  material  weaknesses.

                                       27
<PAGE>

                           PART II - OTHER INFORMATION

ITEM  2.  CHANGES  IN  SECURITIES.

     On  October 15, 2002, the stockholders of the Company approved an amendment
to  the  Company's Amended and Restated Certificate of Incorporation to effect a
one-for-three  reverse  stock split of the Common Stock of the Company ("Reverse
Split").  The Reverse Split was effective as of 5:00 pm, EDT on October 15, 2002
("Effective  Date").  Pursuant to the Reverse Split, each holder of three shares
of Company common stock, par value $0.01 per share ("Old Company Common Stock"),
immediately  prior  to  the  Effective  Date  became  the holder of one share of
Company  common  stock,  par  value $0.01 per share ("New Company Common Stock")
after the Effective Date.  As a result, 27,273,344 shares of Common Stock and no
shares  of  preferred stock were outstanding immediately following the Effective
Date.  Following  the  Reverse  Split,  the  Company  has  100 million shares of
authorized  Common  Stock,  par  value  $.01  per  share and 5 million shares of
authorized  preferred  stock.

ITEM  6.     EXHIBITS  AND  REPORTS  ON  FORM  8-K

(a)     Exhibits

99.1     Certification  of  Gabriel Battista Pursuant to 18 U.S.C. Section 1350,
as  Adopted  Pursuant  to  Section  906  of  the  Sarbanes-Oxley  Act  of  2002.

99.2     Certification  of David G. Zahka Pursuant to 18 U.S.C. Section 1350, as
Adopted  Pursuant  to  Section  906  of  the  Sarbanes-Oxley  Act  of  2002.


(b)     Reports  on  Form  8-K

     During  the  quarter ended September 30, 2002, the Company filed no Current
Reports  on  Form 8-K, although the Company filed Current Reports on Form 8-K on
October  11  and October 16, 2002 in connection with the Company's reverse stock
split  and  the  Company's  early  retirement  of  its  Senior  Credit Facility,
respectively.

                                       28
<PAGE>

                                   SIGNATURES

Pursuant  to  the  requirements  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.

                                TALK AMERICA HOLDINGS, INC.

Date: November 12, 2002         By: /s/ Gabriel Battista
                                    ------------------------
                                    Gabriel  Battista
                                    Chairman  of  the  Board  of  Directors,
                                    Chief  Executive  Officer  and  Director


Date: November 12, 2002         By: /s/ David G. Zahka
                                    ------------------------
                                    David  G.  Zahka
                                    Chief  Financial  Officer
                                   (Principal  Financial  Officer)


Date: November 12, 2002         By: /s/ Thomas M. Walsh
                                    ------------------------
                                    Thomas  M.  Walsh
                                    Senior  Vice  President  -  Finance
                                   (Principal  Accounting  Officer)

                                       29
<PAGE>

                                 CERTIFICATIONS
                                 --------------

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
                       AS ADOPTED PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002


I,  Gabriel  Battista,  certify  that:

     1.  I  have  reviewed  this  quarterly  report on Form 10-Q of Talk America
Holdings,  Inc.;

     2. Based on my knowledge, this quarterly report does not contain any untrue
statement  of a material fact or omit to state a material fact necessary to make
the  statements  made, in light of the circumstances under which such statements
were  made,  not misleading with respect to the period covered by this quarterly
report;

     3.  Based  on  my  knowledge, the financial statements, and other financial
information  included  in  this quarterly report, fairly present in all material
respects  the  financial  condition, results of operations and cash flows of the
registrant  as  of,  and  for,  the  periods presented in this quarterly report;

     4.  The  registrant's  other  certifying officers and I are responsible for
establishing  and  maintaining disclosure controls and procedures (as defined in
Exchange  Act  Rules  13a-14  and  15d-14)  for  the  registrant  and  we  have:

          a)  designed  such  disclosure  controls and procedures to ensure that
          material  information  relating  to  the  registrant,  including  its
          consolidated  subsidiaries, is made known to us by others within those
          entities,  particularly  during  the  period  in  which this quarterly
          report  is  being  prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this  quarterly  report  (the  "Evaluation  Date");  and

          c)  presented  in  this  quarterly  report  our  conclusions about the
          effectiveness  of  the disclosure controls and procedures based on our
          evaluation  as  of  the  Evaluation  Date;

     5.  The  registrant's other certifying officers and I have disclosed, based
on  our  most  recent  evaluation,  to  the  registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent  function):

          a) all significant deficiencies in the design or operation of internal
          controls  which  could  adversely  affect  the registrant's ability to
          record,  process,  summarize  and  report  financial  data  and  have
          identified  for  the  registrant's auditors any material weaknesses in
          internal  controls;  and

          b)  any  fraud,  whether  or not material, that involves management or
          other  employees  who  have  a  significant  role  in the registrant's
          internal  controls;  and

     6.  The registrant's other certifying officers and I have indicated in this
quarterly  report  whether  or  not  there  were significant changes in internal
controls  or  in other factors that could significantly affect internal controls
subsequent  to  the date of our most recent evaluation, including any corrective
actions  with  regard  to  significant  deficiencies  and  material  weaknesses.

November  12,  2002

/s/  Gabriel  Battista
----------------------
Gabriel  Battista
Chief  Executive  Officer

                                       30
<PAGE>

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
                       AS ADOPTED PURSUANT TO SECTION 302
                        OF THE SARBANES-OXLEY ACT OF 2002

I,  David  G.  Zahka,  certify  that:

     1.  I  have  reviewed  this  quarterly  report on Form 10-Q of Talk America
Holdings,  Inc.;

     2. Based on my knowledge, this quarterly report does not contain any untrue
statement  of a material fact or omit to state a material fact necessary to make
the  statements  made, in light of the circumstances under which such statements
were  made,  not misleading with respect to the period covered by this quarterly
report;

     3.  Based  on  my  knowledge, the financial statements, and other financial
information  included  in  this quarterly report, fairly present in all material
respects  the  financial  condition, results of operations and cash flows of the
registrant  as  of,  and  for,  the  periods presented in this quarterly report;

     4.  The  registrant's  other  certifying officers and I are responsible for
establishing  and  maintaining disclosure controls and procedures (as defined in
Exchange  Act  Rules  13a-14  and  15d-14)  for  the  registrant  and  we  have:

          a)  designed  such  disclosure  controls and procedures to ensure that
          material  information  relating  to  the  registrant,  including  its
          consolidated  subsidiaries, is made known to us by others within those
          entities,  particularly  during  the  period  in  which this quarterly
          report  is  being  prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this  quarterly  report  (the  "Evaluation  Date");  and

          c)  presented  in  this  quarterly  report  our  conclusions about the
          effectiveness  of  the disclosure controls and procedures based on our
          evaluation  as  of  the  Evaluation  Date;

     5.  The  registrant's other certifying officers and I have disclosed, based
on  our  most  recent  evaluation,  to  the  registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent  function):

          a) all significant deficiencies in the design or operation of internal
          controls  which  could  adversely  affect  the registrant's ability to
          record,  process,  summarize  and  report  financial  data  and  have
          identified  for  the  registrant's auditors any material weaknesses in
          internal  controls;  and

          b)  any  fraud,  whether  or not material, that involves management or
          other  employees  who  have  a  significant  role  in the registrant's
          internal  controls;  and

     6.  The registrant's other certifying officers and I have indicated in this
quarterly  report  whether  or  not  there  were significant changes in internal
controls  or  in other factors that could significantly affect internal controls
subsequent  to  the date of our most recent evaluation, including any corrective
actions  with  regard  to  significant  deficiencies  and  material  weaknesses.

November  12,  2002

/s/  David  G.  Zahka
---------------------
David  G.  Zahka
Chief  Financial  Officer

                                       31
<PAGE>