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

                       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 JUNE 30, 2001

                                       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.

     78,374,387 shares of Common Stock, par value of $0.01 per share, were
issued and outstanding as of August 7, 2001.

                  TALK AMERICA HOLDINGS, INC. AND SUBSIDIARIES

================================================================================
<PAGE>


                                      INDEX
<TABLE>
<CAPTION>
                                                                                 PAGE
                                                                                 ----
<S>                                                                               <C>
PART I - FINANCIAL INFORMATION:


Item 1.   Consolidated Financial Statements:

         Consolidated  Balance Sheets - June 30, 2001 (unaudited)
         and December 31, 2000....................................................  3

         Consolidated Statements of Operations - Three and Six Months
         Ended June 30, 2001 and 2000 (unaudited).................................  4

         Consolidated  Statements of Cash Flows - Six Months Ended
         June 30, 2001 and 2000 (unaudited).......................................  5

         Notes to Consolidated Financial Statements (unaudited)...................  6

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations................................................ 12

Item 3.  Quantitative and Qualitative Disclosure About Market Risk................ 20


PART II  - OTHER INFORMATION:

Item 6. Exhibits and Reports on Form 8K........................................... 21
</TABLE>
         (a)  Exhibits

         (b)  Reports on Form 8-K




                                       2


<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS


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

<TABLE>
<CAPTION>
                                                                                               JUNE 30,           DECEMBER 31,
                                                                                                 2001                 2000
                                                                                          -------------------   ----------------
                                                                                             (UNAUDITED)
<S>                                                                                               <C>                  <C>
                                        ASSETS

Current assets:
   Cash and cash equivalents                                                                      $24,663              $  40,604
   Accounts receivable, trade, net of allowance for uncollectible accounts of $78,333
     and $29,459, respectively                                                                     50,151                 53,637
   Advances to partitions and notes receivable                                                      1,684                  1,780
   Prepaid expenses and other current assets                                                        1,397                  1,182
                                                                                          -------------------   ----------------
       Total current assets                                                                        77,895                 97,203

Property and equipment, net                                                                        79,756                 83,656
Goodwill and intangibles, net                                                                     206,146                218,639
Other assets                                                                                        7,608                  8,251
                                                                                          -------------------   ----------------
       Total assets                                                                              $371,405               $407,749
                                                                                          ===================   ================
                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Accounts payable, trade and other                                                             $  69,728              $  70,794
  Sales, use and excise taxes                                                                       8,311                  7,935
  Accrued payroll                                                                                   3,056                  2,204
  Deferred revenue                                                                                 14,423                 12,997
  Notes payable and current portion of long-term debt                                               6,579                  2,822
  Contingent redemption value of warrants                                                          32,331                     --
  Contingent redemption value of common stock                                                      53,519                     --
  Other current liabilities                                                                         4,727                  3,519
                                                                                          -------------------   ----------------
       Total current liabilities                                                                  192,674                100,271
                                                                                          -------------------   ----------------

Convertible debt                                                                                  84,945                  84,945
Deferred revenue                                                                                   2,500                   6,200
Long-term debt                                                                                    15,144                  18,750
Deferred income taxes                                                                                253                     253
                                                                                          -------------------   ----------------
       Total liabilities                                                                         295,516                 210,419
                                                                                          -------------------   ----------------

Commitments and contingencies

Contingent redemption value of warrants                                                                --                 36,324
Contingent redemption value of common stock                                                            --                 78,306

Stockholders' equity:
   Preferred stock - $.01 par value, 5,000,000 shares authorized; no shares
     outstanding                                                                                      --                      --
   Common stock - $.01 par value, 300,000,000 shares authorized; 78,374,387 shares
     issued and outstanding                                                                          784                     784
   Additional paid-in capital                                                                    350,129                 286,963
   Treasury stock, 70,747 and 274,497 shares, at cost                                               (993)                 (3,851)
  Deficit                                                                                       (274,031)               (201,196)
                                                                                          -------------------   ----------------
       Total stockholders' equity                                                                 75,889                  82,700
                                                                                          -------------------   ----------------
       Total liabilities and stockholders' equity                                               $371,405                $407,749
                                                                                          ===================   ================
</TABLE>
      See accompanying notes to consolidated financial statements.


                                       3



<PAGE>


                  TALK AMERICA HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                     FOR THE THREE MONTHS             FOR THE SIX MONTHS ENDED
                                                        ENDED JUNE 30,                        JUNE 30,
                                                  ---------------------------        ---------------------------
                                                     2001            2000               2001            2000
                                                  -----------     -----------        -----------    ------------
<S>                                                  <C>            <C>                 <C>            <C>
Sales                                                $133,706       $135,737            $271,537       $291,780

Cost of sales                                          63,513         78,164             128,218        164,692
                                                  -----------     -----------        -----------     -----------

Gross profit                                           70,193         57,573             143,319        127,088

General and administrative expenses                    23,266         13,670              43,711         25,866
Provision for doubtful accounts                        35,852         10,346              50,549         15,510
Promotional,    marketing   and   advertising
expenses                                               26,265         32,512              63,770         69,163
Depreciation and amortization                           9,698          2,004              18,912          3,842
                                                  -----------     -----------        -----------     -----------

Operating income (loss)                               (24,888)          (959)            (33,623)        12,707

Interest (income)                                        (308)        (1,465)               (831)        (2,859)
Interest expense                                        1,542          1,084               3,126          2,171
Other (income) expense, net                              (272)           313                  80            656
                                                  -----------     -----------        -----------     -----------

Income  (loss)  before  provision  for income
taxes                                                 (25,850)          (891)            (35,998)        12,739


Provision for income taxes                                  -              -                   -            250
                                                  -----------     -----------        -----------     -----------
Income (loss) before  cumulative effect of an
accounting change                                     (25,850)          (891)            (35,998)        $12,489
                                                  -----------     -----------        -----------     -----------

Cumulative  effect  of an  accounting  change
(see Note 1)                                          (36,837)             -             (36,837)              -
                                                  -----------     -----------        -----------     -----------

Net income (loss)                                    $(62,687)         $(891)           $(72,835)       $12,489
                                                  ===========     ===========        ===========     ===========

Basic earnings (loss) per share:

  Income (loss) before cumulative effect of
  an accounting change per share                       $(0.33)        $(0.01)             $(0.46)        $ 0.19
  Cumulative effect of an accounting change
  per share                                             (0.47)             -               (0.47)             -
                                                  -----------     -----------        -----------     -----------


   Net income (loss) per share - Basic                 $(0.80)        $(0.01)             $(0.93)         $0.19
                                                  ===========     ===========        ===========     ===========

   Weighted average  common shares
    outstanding - Basic                                78,374         65,822              78,373         65,563
                                                  ===========     ===========        ===========     ===========

Diluted earnings (loss) per share:

  Income (loss) before  cumulative  effect of
  an accounting change per share                       $(0.33)        $(0.01)             $(0.46)         $0.19
  Cumulative effect of an accounting change
  per share                                             (0.47)             -               (0.47)             -
                                                  -----------     -----------        -----------     -----------


  Net income (loss) per share - Diluted                $(0.80)        $(0.01)             $(0.93)          $0.19
                                                  ===========     ===========        ===========     ===========

  Weighted average common and common
    equivalent shares outstanding - Diluted            78,374         65,822              78,373          67,334
                                                  ===========     ===========        ===========     ===========
</TABLE>

           See accompanying notes to consolidated financial statements.


                                       4


<PAGE>


                  TALK AMERICA HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                          FOR THE SIX MONTHS
                                                                                            ENDED JUNE 30,
                                                                                    --------------------------------
                                                                                        2001              2000
                                                                                    -------------    ---------------
<S>                                                                                  <C>                 <C>
Cash flows from operating activities:

   Net income (loss)                                                                 $(72,835)           $12,489
   Reconciliation of net income (loss) to net cash provided by (used in)
     operating activities:
     Provision for doubtful accounts                                                   50,549             15,510
     Depreciation and amortization                                                     18,912              3,842
     Cumulative effect of an accounting change for contingent redemptions              36,837                  -
      Loss on retirement of assets                                                        116                  -
      Changes in assets and liabilities:
         Accounts receivable, trade                                                   (47,063)           (13,807)
         Advances to partitions and notes receivable                                       96                 24
         Prepaid expenses and other current assets                                       (215)             6,752
         Other assets                                                                     643               (955)
         Accounts payables and accrued expenses                                        (1,066)            (1,385)
         Deferred revenue                                                              (2,274)            (3,451)
         Sales, Use and Excise taxes                                                      376             (5,384)
         Other liabilities                                                              2,467                  -
                                                                                    -------------    ---------------
           Net cash provided by (used in) operating activities                        (13,457)            13,635
                                                                                    -------------    ---------------

Cash flows from investing activities:

   Capital expenditures                                                                (2,246)           (16,476)
   Acquisition of intangibles                                                            (154)              (515)
                                                                                    -------------    ---------------
           Net cash (used in) investing activities                                     (2,400)           (16,991)
                                                                                    -------------    ---------------

Cash flows from financing activities:

   Payments of borrowings                                                                 (84)                 -
   Proceeds from exercise of options and warrants                                           -              2,410
    Proceeds from exercise of common stock rights                                           -             11,093
                                                                                    -------------    ---------------
           Net cash provided by (used in) financing activities                            (84)            13,503
                                                                                    -------------    ---------------

Net increase (decrease) in cash and cash equivalents                                  (15,941)            10,147
Cash and cash equivalents, beginning of period                                         40,604             78,937
                                                                                    -------------    ---------------
Cash and cash equivalents, end of period                                            $  24,663          $  89,084
                                                                                    =============    ===============
</TABLE>

       See accompanying notes to consolidated financial statements.


                                       5

<PAGE>


                  TALK AMERICA HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. ACCOUNTING POLICIES:

(A) BASIC PRESENTATION

         The consolidated financial statements include the accounts of Talk
America Holdings, Inc. and its wholly owned subsidiaries (collectively, the
"Company"), and have been prepared as if the entities had operated as a single
consolidated group since their respective dates of incorporation, except as
noted below. All intercompany balances and transactions have been eliminated.
The consolidated financial statements include the results of operations of
Access One Communications Corp. ("Access One") from August 9, 2000, when it was
acquired by the Company in a merger transaction that was accounted for under the
purchase method of accounting for business combinations.

         The consolidated financial statements and related notes thereto as of
June 30, 2001 and for the three and six months ended June 30, 2001 and 2000 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, 2000 was derived from the audited
financial statements included in the Company's Form 10-K. These interim
financial statements should be read in conjunction with the Form 10-K report.
The interim results are not necessarily indicative of the results for any future
periods. Certain prior year amounts have been reclassified for comparative
purposes.

(B) RISKS AND UNCERTAINTIES

         Future results of operations involve a number of risks and
uncertainties. Factors that could affect future operating results 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, including attracting and retaining qualified personnel
             and opening up new territories for its services

         -   Dependence on the availability or functionality of incumbent local
             telephone companies' networks, as they relate to the unbundled
             network element platform or the resale of such services

         -   Increased price competition in local and long distance services

         -   The Company's significant reimbursement and repurchase obligations
             under the Investment Agreement with AOL

         -   Failure or interruption in the Company's network and information
             systems

         -   Changes in government policy, regulation and enforcement

         -   Adverse developments in the Company's relationship with its
             marketing partners

         -   Failure of the marketing of the bundle of the Company's local and
             long distance services under its direct marketing channels and
             under its agreements with its various marketing partners

         -   Failure of the Company to successfully implement a collection
             management system and credit controls for customers

         -   Inability to obtain additional capital required to fully implement
             the Company's business plan and meet existing obligations

         -   Inability to adapt to technological change

         -   Competition in the telecommunications industry

         -   Inability to manage customer attrition and bad debt expense

         -   Adverse change in Company's relationship with third party carriers

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

(C) NEW ACCOUNTING PRONOUNCEMENTS

         Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137,


                                       6

<PAGE>


"Accounting for Derivatives Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for
Certain Derivatives Instruments and Certain Hedging Activities." The standards
require an entity to recognize all derivatives as either assets or liabilities
measured at fair value. The accounting for the changes in fair value of a
derivative depends on the use of the derivative. The cumulative effect of
adopting these new accounting standards did not have a material effect on the
Company's results of operations or its financial position for the periods
presented in the financial statements included herein.

         The Financial Accounting Standards Board (FASB) Emerging Issues Task
Force (EITF) has issued Abstract No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,"
which addresses how such contracts should be classified and measured by the
Company. Under this issue, contracts that require net-cash settlement would be
initially classified as assets or liabilities, then measured at fair value, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as assets or liabilities.
If contracts classified as assets or liabilities are ultimately settled in
shares, any previous gains or losses on those contracts would continue to be
included in earnings. This abstract is effective for all contracts that remained
outstanding at June 30, 2001, and presented on that date as a cumulative effect
of a change in accounting principle. The cumulative effect of the adoption of
this change in accounting principal resulted in a noncash charge to operations
of $36.8 million in the quarter ended June 30, 2001 (see Note 3). On a quarterly
basis the Company will reassess the fair value of the liability associated with
these contracts and any difference will be recorded in earnings.

         In July of 2001, the Financial Accounting Standards Board (FASB) issued
Statements No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets," which eliminate the pooling of interests method of
accounting, establish new criteria for identification of separate intangibles
acquired, and establish the impairment approach rather than amortization for
goodwill. The Company has $191.7 million of net goodwill and $14.4 million of
net identifiable intangible assets as of June 30, 2001 and has recorded $12.6
million of amortization expense in the six months ended June 30, 2001. Effective
January 1, 2002 the Company will no longer be required to record amortization
expense on goodwill, but will instead be required to evaluate these assets for
potential impairment on a quarterly basis and to record a charge for any such
impairment. Management is in the process of reviewing the assets for potential
impairment and if there is an impairment, the Company may incur a cumulative
effect charge of adopting these statements in the first quarter of 2002.

2. AOL AGREEMENTS:

         Since 1997, the Company has negotiated a number of agreements and
amendments to its agreements with America Online Inc. ("AOL") for the marketing
and sale of telecommunications services to AOL subscribers. A substantial
amendment to the AOL agreement in January 1999 provided for: quarterly payments
by the Company to AOL during the long distance exclusivity period of the
agreement, with fixed quarterly payments ranging from $10.0 to $15.0 million
($19.0 million after July 1, 2000 if AOL elects to provide certain additional
marketing and promotions to the Company) until June 30, 2001 and quarterly
payments thereafter at a fixed 5% of the Company's marginable long distance
revenues from AOL subscribers in the quarter under the agreement; quarterly
payments by the Company to AOL, after termination of the long distance
exclusivity period and so long as AOL continues to provide certain levels of
marketing and promotions to the Company under the agreement, at an annual
declining fixed percentage of the Company's marginable long distance revenues
from AOL subscribers under the agreement, starting at 5% and declining by one
percentage point each year to 1%; the elimination of the Company's obligation to
make bounty and current profit-sharing payments to AOL; alteration of the terms
of the online and offline marketing arrangements between the Company and AOL;
extension of the term of the AOL agreement, including the exclusivity period,
until June 30, 2003, although AOL has the right, in each year beginning in 2000,
to elect, on or before May 1 of such year, to end the Company's long distance
exclusivity period as of June 30 of such year; elimination of AOL's rights to
receive further warrants to purchase Common Stock based upon customers gained
from the AOL subscriber base; AOL's contribution of up to $4.0 million (up to
$6.0 million if the Company pays $19.0 million as noted above) per quarter until
June 30, 2001, for offline marketing; and establishment of the framework for the
Company to offer additional services and products to AOL subscribers. By an
amendment dated as of June 30, 2000, AOL agreed to give the Company a $1.0
million credit in each of the second and third quarters of 2000 against amounts
otherwise payable by the Company under the AOL agreement. By a further amendment
dated as of August 1, 2000, in consideration of AOL's agreement to provide
certain additional marketing in the last


                                       7

<PAGE>

five months of 2000, the Company agreed to make additional payments to AOL of
$3.0 million in August, 2000 and $1.0 million in each of the months in the
fourth quarter of 2000, which amounts were to be credited against the Company's
payment obligations in any quarter for which the Company is required to pay at
the quarterly rate of $19.0 million.

         AOL elected to exercise its right to terminate the long distance
exclusivity as of June 30, 2001 and thereafter the Company's right to offer long
distance services continues on a non-exclusive basis until June 30, 2003.


         On January 5, 1999, pursuant to an Investment Agreement between AOL and
the Company, AOL purchased a total of 4,121,372 shares of Common Stock of the
Company for $55.0 million in cash and the surrender of rights to purchase
5,076,016 shares of Common Stock of the Company pursuant to various warrants
held by AOL. AOL agreed to end further vesting under the outstanding performance
warrant and retained vested warrants exercisable for 2,721,984 shares of Common
Stock. See Note 3 below for a discussion of certain contingent reimbursement
obligations of the Company in favor of AOL.

3. CONTINGENT REDEMPTION VALUE OF WARRANTS AND COMMON STOCK:

CONTINGENT REDEMPTION VALUE OF WARRANTS

         Under the terms of the Investment Agreement with AOL, AOL has the right
to require the Company to repurchase the warrants to purchase 2,721,984 shares
of Common Stock of the Company held by AOL for an aggregate price of $36.3
million, which repurchase price can be paid in Common Stock or cash (provided
that some portion of the repurchase price may be payable in a quarterly
amortization, two-year promissory note of the Company if the repurchase price
exceeds the then current valuation of the warrants being purchased). Upon the
occurrence of certain events, including material defaults by the Company in its
AOL agreements and a "change of control" of the Company, the Company may be
required to purchase the warrants for cash.

         The Company had originally recorded $36.3 million for the contingent
redemption value of these warrants with a corresponding reduction in additional
paid-in capital. In connection with the implementation of EITF 00-19, the
contingent redemption feature of the warrants was recorded as a liability at its
fair value of $32.3 million as of June 30, 2001. The increase in the fair value
of this contingent redemption feature from issuance on January 5, 1999 to June
30, 2001 was $14.4 million, which has been presented as a cumulative effect of a
change in accounting principle in the statement of operations.

CONTINGENT REDEMPTION VALUE OF COMMON STOCK

         Under the terms of the Investment Agreement with AOL, the Company has
agreed to reimburse AOL for losses AOL may incur on the sale of any of the
4,121,372 shares of Common Stock during the period from June 1, 1999 through
September 30, 2001. The Company has the first right to purchase any of the
4,121,372 shares of Common Stock at the market value on the day that AOL
notifies the Company of its intent to sell any of the shares plus an amount, if
any, equal to the Company's reimbursement obligation described below. The
reimbursement amount would be determined by multiplying the number of shares, if
any, that AOL sells during the applicable period by the difference between the
purchase price per share paid by AOL, or $19 per share, and the price per share
that AOL sells the shares for, if less than $19 per share. The reimbursement
amount may not exceed $14 per share for 2,894,737 shares or $11 per share for
1,226,635 shares. Accordingly, the maximum amount payable to AOL as
reimbursement on the sale of AOL's shares would be approximately $54.0 million
plus AOL's reasonable expenses incurred in connection with the sale. The Company
has the option of issuing a six-month 10% note payable to AOL to satisfy the
reimbursement amount or other amounts payable on exercise of its first refusal
rights. Assuming AOL were to sell all of its shares subject to the Company's
reimbursement obligation at the closing price of Common Stock as of June 30,
2001, the reimbursement amount would be approximately $54 million. 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 also
may be required to repurchase all of the shares at $19 per share. The Company
has pledged the stock of its subsidiaries and has agreed to fund an escrow
account of up to $35 million from 50% of the proceeds of any debt financing,
other than a bank, receivable or other asset based financing of up to $50
million, to

                                       8

<PAGE>

secure its obligations under the Investment Agreement with AOL. AOL has agreed
that it will subordinate its security interests to permit the securitization of
certain future financings by the Company.

         The Company had originally recorded $78.3 million for the contingent
redemption value of this Common Stock 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 was recorded as a
liability at its fair value of $53.5 million as of June 30, 2001. The increase
in the fair value of this contingent redemption feature from issuance on January
5, 1999 to June 30, 2001 was $22.4 million, which has been presented as a
cumulative effect of a change in accounting principle in the statement of
operations.

4. LEGAL PROCEEDINGS:

         On June 16, 1998, a purported shareholder class action was filed in the
United States District Court for the Eastern District of Pennsylvania (the
"Court") against the Company and certain of its officers alleging violation of
the securities laws in connection with certain disclosures made by the Company
in its public filings and seeking unspecified damages. Thereafter, additional
lawsuits making substantially the same allegations were filed by other
plaintiffs in the same court. A motion to dismiss was granted as to certain
officers of the Company and denied as to the Company. There are currently no
officers of the Company who are a party to these actions. On July 19, 2000, a
class was certified. On July 20, 2001, the Company entered into a Stipulation
and Agreement of Settlement, which received preliminary approval from the Court
on July 26, 2001. The Company believes that this matter will be settled
according to the terms of the Stipulation and Agreement of Settlement, with the
settlement amount paid by the Company's insurance carrier.

         The Company also is a party to a number of legal actions and
proceedings, including purported class actions, arising from the Company's
provision and marketing of telecommunications services, as well as certain
arbitration and 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.

5. ACQUISITION:

         On August 9, 2000, a wholly owned subsidiary of the Company merged with
and into Access One Communications Corp. ("Access One"). Access One was a
private, local telecommunications service provider to nine states in the
southeastern United States. As a result of this merger, Access One became a
wholly owned subsidiary of the Company and Access One stockholders received an
aggregate of approximately 12.2 million shares of the Company's common stock,
and outstanding options and warrants to purchase shares of Access One common
stock converted to options and warrants to purchase an aggregate of 2.1 million
shares of the Company's common stock. The total purchase price was approximately
$201.6 million and the merger was accounted for under the purchase method of
accounting for business combinations. Accordingly, the consolidated financial
statements include the results of operations of Access One from the merger date.
The merger resulted in the recording of intangible assets of approximately $15.9
million and goodwill of $210.0 million, which are being amortized on a
straight-line basis over their expected benefit period of five years for
intangible assets and ten years for goodwill. (See Note 1).


                                       9

<PAGE>


         The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if the Access One merger
had taken place at the beginning of the periods presented:

<TABLE>
<CAPTION>

                                                            (In thousands, except per share data)
                                                  Three Months Ended June 30,       Six Months Ended June 30,
                                                     2001            2000             2001          2000
                                                     ----            ----             ----          ----

<S>                                                <C>              <C>             <C>          <C>
Sales                                              $133,706         $146,673        $271,537     $312,855

Net income (loss)                                  $(62,687)        $(17,517)       $(72,835)     $(6,976)
                                           ---------------------------------------------------------------

Basic earnings (loss) per common share:

    Net (loss) income                                $(0.80)          $(0.22)         $(0.93)      $(0.09)
                                           ---------------------------------------------------------------
Diluted earnings (loss) per common share:

    Net (loss) income                                $(0.80)          $(0.21)         $(0.93)      $(0.09)
                                           ---------------------------------------------------------------
</TABLE>




         The pro forma consolidated results of operations include adjustments to
give effect to amortization of intangibles, consulting fees and shares of common
stock issued. These unaudited pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have occurred had the merger been made at the
beginning of the periods presented or the future results of the combined
operations.

                                       10
<PAGE>

6.  PER SHARE DATA:

         Basic earnings per common share is calculated using the average number
of shares of common stock outstanding, while diluted earnings per common share
reflects the potential dilution that could occur if stock options and warrants
were exercised and convertible bonds were converted into common stock. Earnings
per share are computed as follows (amounts in thousands, except per share data):

<TABLE>
<CAPTION>
                                                       Three Months Ended                     Six Months Ended
                                                            June 30,                              June 30,
                                                ---------------------------------     ---------------------------------
                                                     2001                2000               2001               2000
                                                     ----                ----               ----               ----

<S>                                                <C>                    <C>             <C>                 <C>
Income (loss) before cumulative effect of an
accounting change                                  $(25,850)              $(891)          $(35,998)           $12,489

Cumulative effect of an accounting change           (36,837)                  -            (36,837)                 -
                                                -------------     ---------------     --------------     --------------

Net income (loss)                                  $(62,687)              $(891)          $(72,835)           $12,489
                                                =============     ===============     ==============     ==============

Weighted average shares of common stock
outstanding used to compute basic earnings
(loss) per common share                              78,374              65,822             78,373             65,563
Additional common shares to be issued
assuming exercise of stock options and
warrants, net of shares assumed reacquired                -                   -                  -              1,771
                                                -------------     ---------------     --------------     --------------
Weighted average shares used to compute
diluted earnings (loss) per share                    78,374              65,822             78,373             67,334
                                                =============     ===============     ==============     ==============

Basic earnings (loss) per share:
  Income  (loss) before  cumulative  effect of
  an accounting change per share                     $(0.33)             $(0.01)            $(0.46)             $0.19
  Cumulative  effect of an  accounting  change
  per share                                           (0.47)                  -              (0.47)                 -
                                                -------------     ---------------     --------------     --------------
    Net income (loss) per share-Basic                $(0.80)             $(0.01)            $(0.93)              $0.19
                                                =============     ===============     ==============     ==============

Diluted earnings (loss) per share:
  Income  (loss) before  cumulative  effect of
  an accounting change per share                     $(0.33)             $(0.01)            $(0.46)              $0.19
  Cumulative  effect of an  accounting  change
  per share                                           (0.47)                 --              (0.47)                 --
                                                -------------     ---------------     --------------     --------------
  Net income (loss) per share-Diluted                $(0.80)             $(0.01)            $(0.93)              $0.19
                                                =============     ===============     ==============     ==============
</TABLE>

The diluted share basis for the three and six months ended June 30, 2001
excludes shares related to options to purchase, and warrants exercisable for,
17,463,267 shares and convertible bonds that are convertible into 3,436,891
shares. These shares are excluded due to their antidilutive effect as a result
of the Company's net loss.

Note 7.  Credit Facility

The Company entered into a Credit Facility Agreement with MCG Finance
Corporation, providing for a term loan of up to $20.0 million and a line of
credit facility permitting such subsidiaries to borrow up to an additional $30.0
million. The Credit Facility Agreement subjects the Company and its subsidiaries
to certain restrictions and covenants related to, among other things, liquidity,
per-subscriber-type revenue, subscriber acquisition costs, leverage ratio and
interest coverage ratio requirements. As of June 30, 2001, the Company would
have been in default of its long distance subscriber acquisitions costs covenant
but for a waiver from MCG Finance Corporation. The waiver covered compliance
through the second quarter of 2001. In connection with the waiver and certain
other agreements by the lenders under the Credit Facility Agreement, the Company
is issuing warrants to purchase 150,000 shares of its common stock at $0.68 per
share to such lenders.


                                       11

<PAGE>

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

OVERVIEW

         Talk America Holdings, Inc. through its subsidiaries (the "Company" or
"Talk") provides local and long distance telecommunication services to
residential and small business customers throughout the United States.

         The Company's telecommunication services offerings include local and
long distance telecommunication services, primarily local services bundled with
long distance services, inbound toll-free service and dedicated private line
services for data transmission. The Company seeks to expand its customer base
through its direct marketing channels and marketing arrangements with business
partners and to build a more diverse products and services portfolio, including
non-telecommunication products and services. In connection with the Company's
strategy to diversify its product portfolio and to bundle local service with its
core long distance service offerings, the Company acquired Access One
Communications Corp. ("Access One") in August, 2000. Access One was a private,
local telecommunication services provider to nine states in the southeastern
United States.

         The Company is continuing its expansion plan and expects to introduce
its bundled service offering in eight new states over the next six months, which
would bring to 25 the number of states where the Company would be offering its
bundled service. During this period, the Company intends to continue to focus
its resources on addressing operational issues that it encounters and improving
efficiencies of the Company's bundled business model, managing its business to
generate free cash flow and building a highly scaleable nationwide platform to
provision, bill and service bundled customers across the nation. During the
second quarter of 2001, the Company established reserves of $35.9 million to
provide for doubtful accounts, of which $16.3 million reflects customers
acquired through since discontinued marketing programs and customers provisioned
to the Company's bundled service that the Company now believes are unlikely to
pay. In connection therewith, the Company is implementing a new collections
management system and adopting more stringent credit controls. As it pursues
this plan to improve efficiencies of the Company's bundled business model and
implements the front-end customer quality initiatives, the Company anticipates
that it will incur a significantly lower level of marketing and promotion
expenditures during the balance of 2001 compared to the same period of 2000.
Consequently, the Company expects its EBITDA for 2001 to be between $4 to $6
million. EBITDA is defined as net income or loss adjusted to eliminate interest
income and expense, taxes, depreciation and amortization, and cumulative effect
of accounting changes.


                                       12


<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 SIX MONTHS ENDED
                                                        ENDED JUNE 30,                        JUNE 30,

                                                     ---------------------------        ---------------------------
                                                        2001            2000               2001            2000
                                                     -----------     -----------        -----------     -----------

<S>                                                       <C>            <C>                 <C>            <C>
Sales                                                     100.0%         100.0%              100.0%         100.0%
Cost of sales                                              47.5           57.6                47.2           56.4
                                                     -----------     -----------        -----------     -----------

Gross profit                                               52.5           42.4                52.8           43.6
                                                     -----------     -----------        -----------     -----------

General and administrative expenses                        17.4           10.1                16.1            8.9
Promotional,    marketing   and   advertising
expenses                                                   19.6           23.9                23.5           23.7
Depreciation and amortization                               7.3            1.5                 7.0            1.3
Provision for doubtful accounts                            26.8            7.6                18.6            5.3
                                                     -----------     -----------        -----------     -----------

Operating income (loss)                                   (18.6)          (0.7)              (12.4)           4.4

Interest (income)                                          (0.2)          (1.0)               (0.3)          (0.9)
Interest expense                                            1.1            0.8                 1.2            0.7
Other expense, net                                         (0.2)           0.2                 0.0            0.2
                                                     -----------     -----------        -----------     -----------

Income (loss) before income taxes                         (19.3)          (0.7)              (13.3)           4.4

Provision for income taxes                                    -              -                   -            0.1
                                                     -----------     -----------        -----------     -----------
Income (loss) before  cumulative effect of an
accounting change                                         (19.3)         (0 .7)              (13.3)           4.3

Cumulative effect of an accounting change                 (27.6)             -               (13.5)             -
                                                     -----------     -----------        -----------     -----------

Net income (loss)                                         (46.9)          (0.7)              (26.8)           4.3
                                                     ===========     ===========        ===========     ===========
</TABLE>


QUARTER ENDED JUNE 30, 2001 COMPARED TO QUARTER ENDED JUNE 30, 2000

         Sales. Sales decreased by 1.5% to $133.7 million for the quarter ended
June 30, 2001 from $135.7 million for the quarter ended June 30, 2000. Sales for
the quarter ended June 30, 2001 decreased by 3.0% compared to sales of $137.8
million for the quarter ended March 31, 2001. The decrease in sales for the
quarter ended June 30, 2001 compared to June 30, 2000 primarily reflected the
Company's (i) decision to focus its efforts in the local telecommunication
services market by offering local telecommunication services bundled with long
distance services in 2000; (ii) the Company's election to exit the international
wholesale business; and (iii) a decline in the number of long distance customers
obtained under various marketing agreements (including AOL) and a decrease in
the Company's other sales. The Company's bundled sales for the quarter ended
June 30, 2001 totaled $52.9 million compared to $543,000 in the second quarter
of last year and $49.7 million for the quarter ended March 31, 2001. The
Company's international wholesale sales for the quarter ended June 30, 2000 were
$13.0 million; however, the Company elected to exit the international wholesale
business in late 2000 because of the low gross profit margins associated
therewith; consequently, the Company had no international sales in the second
quarter of 2001. The Company's long distance sales decreased to $80.8 million
for the quarter ended June 30, 2001 from $135.2 million


                                       13

<PAGE>

for the quarter ended June 30, 2000 due in part to the Company's focus on bundle
sales, churn, a decline in gross additions of new long distance customers (due
to significant reduction in the second quarter of 2000 in the principal
marketing opportunity provided to the Company by AOL) and the conversion of long
distance customers to the Company's bundled service offering.

         A significant percentage of the Company's revenues in the quarters
ended June 30, 2001 and June 30, 2000 were derived from long distance
telecommunication services provided to customers who were obtained under the AOL
agreement and a significant decline in its AOL subscribers that is not offset by
growth in other subscribers could have a significant effect on the Company's
results of operations and cash flow. While the Company's rights to market long
distance exclusively under the AOL agreement ended on June 30, 2001, the
Company's rights to continue to market its services to AOL subscribers on a
non-exclusive basis, but with significant marketing rights, continues until June
30, 2003. Because of the Company's focus as outlined above, the opportunities to
offer the bundle of local and long distance telecommunication services directly
to customers and the significant marketing rights that continue after June 30,
2001 and the reduced marketing payments to AOL, the Company believes that the
early termination of the exclusivity period should not be detrimental to the
Company's business. The Company plans to continue to market its services to AOL
subscribers, and also plans to increase its efforts outside of AOL to expand its
base of bundled and long distance customers as discussed above.

         While the Company expects bundled revenues in all of 2001 to be up by
approximately 400% compared to bundled revenues in 2000, it expects (i) bundled
revenue to be flat in the third quarter compared to the second quarter of 2001
and to be down approximately 10% for the fourth quarter, as the Company pursues
its plans to improve efficiences of the Company's bundled business model and
continues to implement its new collections management system and its more
stringent customer credit controls, and (ii) long distance revenue to drop 10%
to 15% sequentially in the third quarter from the second quarter of 2001 and to
be down approximately 35% to 40% in 2001 compared to 2000 after adjusting long
distance revenue for the year ended 2000 to exclude international wholesale
revenue, as the Company continues to focus on marketing its bundled services
plan.

         Cost of Sales. Cost of sales decreased by 18.7% to $63.5 million in the
quarter ended June 30, 2001 from $78.2 million in the quarter ended June 30,
2000, and, as a percentage of sales, decreased to 47.5% as compared to 57.6% for
the same quarter last year. The decreases were primarily due to a decrease in
network costs as a result of exiting the international wholesale business, a
lower number of long distance customers, a reduction in access and usage charges
and a reduction in primary interexchange carrier charges ("PICC"). The decrease
in network costs was partially offset by increases in costs to incumbent local
telephone companies related to the Company's efforts in the local
telecommunication market. In addition, partition costs and billing costs
were lower.

         Gross Profit. Gross profit increased by 21.9% in the quarter ended June
30, 2001 to $70.2 million from $57.6 million in the quarter ended June 30, 2000,
and, as a percentage of sales, increased to 52.5% as compared to 42.4% for the
same quarter last year. The increase in gross profit percentage was primarily
due to lower network, partition and billing costs and increased margin
associated with the Company's bundled sales compared to the margin of
international wholesale, offset by increased cost associated with the growing
local business. Due to the growth of local bundled service revenue as a
percentage of total revenue, the early stage of development of the Company's
local service initiative, as well as the intensification of price competition
for the Company's products, the Company may not continue to experience an upward
trend in gross profits in the future. The Company expects that gross profit
percentage will remain in the range of 50% to 53% throughout the remainder of
the year.

         General and Administrative Expenses. General and administrative
expenses increased by 70.2% to $23.3 million in the quarter ended June 30, 2001
from $13.7 million in the quarter ended June 30, 2000, and as a percentage of
sales, increased to 17.4% as compared to 10.1% for the same quarter last year.
The increase in general and administrative expenses was due primarily to
increased costs associated with additional personnel to support the Company's
growth in the local services business and the additional sales, provisioning and
customer service support for its local customers.

         Provision for Doubtful Accounts. Provision for doubtful accounts
increased by 246.5% to $35.9 million in 2001 from $10.3 million in 2000, and, as
a percentage of sales, increased to 26.8% as compared to 7.6% for the same
quarter last year. The increase in provision for doubtful accounts was due to
(i) the provision for certain receivables that the Company does not expect to
collect; and (ii) the provision for customers with poor credit quality acquired
through discontinued marketing programs. The Company expects the provision for
doubtful accounts to be


                                       14
<PAGE>


$15 to $20 million for the quarter ended September 30, 2001 due in part to the
implementation of a new collections management system and adoption of more
stringent credit controls.

         Promotional, Marketing and Advertising Expenses. During the quarter
ended June 30, 2001, the Company incurred $26.3 million of promotional,
marketing and advertising expenses as compared to $32.5 million in the quarter
ended June 30, 2000, a 19.2% decrease, and as a percentage of sales, a decrease
to 19.6% as compared to 24.0% for the same quarter last year. This decrease is
attributable to a charge taken in the quarter ended June 30, 2000 related to
ending a marketing relationship, decreased promotional and advertising campaigns
for long distance customers, partially offset by expanding efforts for the
Company's local bundled customer base, and, as the Company continued to
implement its previously announced plan to improve efficiencies of the Company's
bundled business model outlined above, the Company's efforts to scale down
promotional, marketing and advertising expenses. AOL fixed marketing fees
increased from the quarter ended June 30, 2000 to the quarter ended June 30,
2001, which was offset by a decrease in the AOL rewards points program which
ended in the second quarter of 2000. The Company expects to incur promotional,
marketing and advertising expenses of approximately $15 million for the third
quarter of 2001 as it continues to pursue subscribers to its bundle of local and
long distance telecommunication service, particularly non-AOL subscribers.

         Depreciation and Amortization. Depreciation and amortization for the
quarter ended June 30, 2001 was $9.7 million, an increase of $7.7 million
compared to $2.0 million in the quarter ended June 30, 2000, and as a percentage
of sales, an increase to 7.3% as compared to 1.5% for the same quarter last
year. This increase is due primarily to the amortization of the goodwill
recorded upon the Access One acquisition, along with additional property,
equipment and intangibles that were acquired by the Company in the acquisition
of Access One. The excess of the purchase price over the fair value of the net
assets acquired in the Access One acquisition was approximately $225.9 million
and has been recorded as goodwill and intangible assets, which is being
amortized on a straight-line basis. Intangibles consist primarily of a service
mark and purchased customer accounts and workforce.

         Interest Income. Interest income was $0.3 million for the quarter ended
June 30, 2001 versus $1.5 million for the quarter ended June 30, 2000. The
interest income in 2000 was higher due to the Company's higher average cash
balances during 2000.

         Interest Expense. Interest expense was $1.5 million for the quarter
ended June 30, 2001 versus $1.1 million for the quarter ended June 30, 2000. The
increase is due to interest on debt assumed with the acquisition of Access One
and interest on additional borrowings by the Company in the second half of 2000.

         Cumulative effect of an accounting change. The Company adopted Emerging
Issues Task Force (EITF) Abstract No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock," in the quarter ended June 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 quarter ended June 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.

SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

         Sales. Sales decreased by 6.9% to $271.5 million for the six months
ended June 30, 2001 from $291.8 million for the six months ended June 30, 2000.
The decrease in sales for the six months ended June 30, 2001 compared to June
30, 2000 primarily reflected the Company's (i) decision to focus its efforts in
the local telecommunication market by offering local telecommunication services
bundled with long distance services in 2000; (ii) the Company's election to exit
the international wholesale business; and (iii) a decline in the number of long
distance customers obtained under various marketing agreements (including AOL)
and a decrease in the Company's other sales. The Company's bundled sales for the
six months ended June 30, 2001 totaled $102.6 million compared to $543,000 in
the six months ended June 30, 2000 and $81.8 million for the six months ended
March 31, 2001. The Company's international wholesale sales for the six months
ended June 30, 2000 were $26.1 million; however, the Company elected to exit the
international wholesale business in late 2000 because of the low gross profit
margins associated therewith; consequently, the Company had no international
sales in the first and second quarters of 2001. The Company's long distance
sales decreased to $168.9 million for the six months ended June 30, 2001 from
$291.8 million for the six months ended June 30, 2000 due in part to the
Company's focus on

                                       15

<PAGE>

bundled sales, churn, a decline in gross additions of new long distance
customers (due to significant reduction in the second quarter of 2000 in the
principal marketing opportunity provided to the Company by AOL) and the
conversion of long distance customers to the Company's bundled service offering.

         Cost of Sales. Cost of sales decreased by 22.2% to $128.2 million in
the six months ended June 30, 2001 from $164.7 million in the six months ended
June 30, 2000, and as a percentage of sales, decreased to 47.2% as compared to
56.4% for the same period last year. The decreases were primarily due to a
decrease in network costs as a result of exiting the international wholesale
business, a lower number of long distance customers, a reduction in access and
usage charges and a reduction in PICC charges. The decrease in network costs was
partially offset by increases in costs to incumbent local telephone companies
related to the Company's efforts in the local telecommunication market. In
addition, partition costs and billing costs were lower.

         Gross Profit. Gross profit increased by 12.8% for the six months ended
June 30, 2001 to $143.3 million from $127.1 million for the six months ended
June 30, 2000, and, as a percentage of sales, increased to 52.8% as compared to
43.6% for the same period last year. The increase in gross profit percentage was
primarily due to lower network, partition and billing costs and increased margin
associated with the Company's bundled sales compared to the margin of
international wholesale, offset by increased cost associated with the growing
local business.

         General and Administrative Expenses. General and administrative
expenses increased by 69.0% to $43.7 million for the six months ended June 30,
2001 from $25.9 million for the six months ended June 30, 2000, and as a
percentage of sales, increased to 16.1% as compared to 8.9% for the same period
last year. The increase in general and administrative expenses was due primarily
to increased costs associated with additional personnel to support the Company's
growth in the local services business and the additional sales, provisioning and
customer service support for its local customers.

         Provision for Doubtful Accounts. Provision for doubtful accounts
increased by 225.9% to $50.5 million for the six months ended June 30, 2001 from
$15.5 million in 2000, and as a percentage of sales, increased to 18.6% as
compared to 5.3% for the same period last year. The increase in provision for
doubtful accounts was due to (i) the provision for certain receivables that the
Company does not expect to collect; and (ii) the provision for customers with
poor credit quality acquired through discontinued marketing programs.

         Promotional, Marketing and Advertising Expenses. During the six months
ended June 30, 2001 the Company incurred $63.8 million of promotional, marketing
and advertising expenses as compared to $69.2 million for the six months ended
June 30, 2000, a 7.8% decrease, and as a percentage of sales, a decrease to
23.5% as compared to 23.7% for the same period last year. This decrease is
attributable to a charge taken in the quarter ended June 30, 2000 related to
ending a marketing relationship, and decreased promotional and advertising
campaigns for long distance customers, partially offset by expanding efforts for
the Company's local bundled customer base. AOL fixed marketing fees increased by
$6 million from the six months ended June 30, 2000 to the six months ended June
30, 2001; this increase was partially offset by a decrease in the AOL rewards
points program, which ended in the second quarter of 2000. In addition, the
Company's efforts to scale down promotional, marketing and advertising expenses
in the second quarter of 2001 also contributed to the overall decrease.

         Depreciation and Amortization. Depreciation and amortization for the
six months ended June 30, 2001 was $18.9 million, an increase of $15.1 million
compared to $3.8 million in the six months ended June 30, 2000, and as a
percentage of sales, an increase to 7.0% as compared to 1.3% for the same period
last year. This increase is due primarily to the amortization of the goodwill
recorded upon the Access One acquisition, along with additional property,
equipment and intangibles that were acquired by the Company in the acquisition
of Access One.

         Interest Income. Interest income was $0.8 million for the six months
ended June 30, 2001 versus $2.9 million for the six months ended June 30, 2000.
The interest income in 2000 was higher due to the Company's higher average cash
balances during 2000.

         Interest Expense. Interest expense was $3.1 million for the six months
ended June 30, 2001 versus $2.2 million for the six months ended June 30, 2000.
The increase is due to interest on debt assumed with the acquisition of Access
One and interest on additional borrowings by the Company in the second half of
2000.


                                   16

<PAGE>

         Other Expense, Net. Net other expense was $656,000 for the six months
ended June 30, 2000, mostly attributable to a one-time fee paid to a marketing
partner. Net other expense for the six months ended June 30, 2001 was not
significant.

         Provision for Income Taxes. The Company recorded a $250,000 provision
for income taxes in the six months ended June 30, 2000 related to the expected
payment of federal income taxes on alternative minimum taxable income. Although
the Company had net operating loss carryforwards sufficient to offset expected
taxable income for 2000, the loss carryforwards can only reduce up to 90% of
alternative minimum taxable income.

         Cumulative effect of an accounting change. The Company adopted Emerging
Issues Task Force (EITF) Abstract No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock," in the quarter ended June 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 quarter ended June 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.

LIQUIDITY AND CAPITAL RESOURCES

         The Company had $24.7 million of cash and cash equivalents as of June
30, 2001, and $40.6 million as of December 31, 2000. The decrease in cash and
cash equivalents is primarily the result of the operating loss for the first
half of 2001 of $72.8 million and growth in the Company's gross trade
receivables by approximately $47.1 million, offset by non-cash items, including
the provision for doubtful accounts of $50.6 million, depreciation and
amortization of $18.9 million and the cumulative effect of an accounting change
of $36.8 million.

         Gross trade receivables increased from $83.1 million at December 31,
2000 to $128.5 million at June 30, 2001 and the allowance for uncollectible
accounts increased to $78.3 million at June 30, 2001 from $29.5 million at
December 31, 2000. The increase in trade receivables and the corresponding
increase in the allowance for uncollectible accounts is primarily attributable
to: (i) the provision for certain receivables that the Company does not now
expect to collect; and (ii) the provision for customers with poor credit history
acquired through since discontinued marketing programs.

         Net cash used in operating activities was $13.5 million for the six
months ended June 30, 2001. Net cash provided by operating activities was $13.6
million for the six months ended June 30, 2000. For the six months ended June
30, 2001, the major contributors to the net cash used in operating activities
were the net loss of $72.8 million, an increase in accounts receivable of $47.1
million, offset by non-cash items of $106.4 million. The non-cash items
primarily consisted of provision for doubtful accounts of $50.5 million;
depreciation and amortization of $18.9 million and the cumulative effect of an
accounting change for contingent redemptions of $36.8 million. For the six
months ended June 30, 2000, the net cash provided by operating activities was
mainly generated by net income of $12.5 million, an increase in trade
receivables of $13.8 million, decreases in accounts payable, accrued expenses
and sales, use and excise tax of $6.8 million, decrease in deferred revenue of
$3.4 million, offset by a decrease in prepaid expenses and other current assets
of $6.8 million and adjustments to net income for non-cash items of $19.4
million.

         Net cash used in investing activities of $2.4 million during the six
months ended June 30, 2001 related primarily to the purchase of property and
equipment. Net cash used in investing activities of $17.0 million during the six
months ended June 30, 2000, related primarily to the purchase of property and
equipment.

         The Company had no significant cash used in financing activities for
the six months ended June 30, 2001. The net cash provided by financing
activities for the six months ended June 30, 2000, was received from the
exercise of stock options and common stock rights for $13.5 million.

         Under the terms of the Investment Agreement with AOL, the Company
agreed to reimburse AOL for losses AOL may incur on the sale of any of the
4,121,372 shares of Company common stock held by AOL during the period from June
1, 1999 through September 30, 2000. By an amendment dated as


                                       17

<PAGE>


of August 2, 2000, the period during which AOL may exercise its rights to
reimbursement for losses on the sale of stock, as described above, was extended
from September 30, 2000 to September 30, 2001. The Company also received a
letter from AOL dated as of August 2, 2000 confirming that AOL did not intend to
exercise such rights to reimbursement for shortfalls earlier than December 31,
2000. The reimbursement amount would be determined by multiplying the number of
shares, if any, that AOL sells during the applicable period by the difference
between the purchase price per share paid by AOL, or $19 per share, and the
price per share that AOL sells the shares for, if less than $19 per share. The
reimbursement amount may not exceed $14 per share for 2,894,737 shares or $11
per share for 1,226,635 shares. Accordingly, the maximum amount payable to AOL
as reimbursement on the sale of AOL's shares would be approximately $54.0
million plus AOL's reasonable expenses incurred in connection with the sale. The
Company has the option of issuing a six-month 10% note payable to AOL to satisfy
the reimbursement amount or other amounts payable on exercise of its first
refusal rights. Assuming AOL were to sell all of its shares subject to the
Company's reimbursement obligation at the closing price of Company common stock
on June 30, 2001, the reimbursement amount would be approximately $54.0 million.

         In addition, AOL also has the right, commencing on July 1, 2001, to
require the Company to repurchase warrants held by AOL to purchase 2,721,984
shares of Company common stock for $36.3 million, which repurchase price can be
paid in Common Stock or cash (provided that some portion of the repurchase price
may be payable in a quarterly amortization, two-year promissory note of the
Company if the repurchase price exceeds the then current valuation of the
warrants being purchased). In addition, 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 may be required to repurchase
for cash all of the shares held by AOL for $78.3 million ($19 per share), and
the warrants for $36.3 million. The Company has pledged the stock of its
subsidiaries and has agreed to fund an escrow account of up to $35.0 million
from 50% of the proceeds of any debt financing, other than a bank, receivable or
other asset based financing of up to $50.0 million, to secure its obligations
under the Investment Agreement with AOL.

         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 and their dispersion
across different geographic regions. The increase in provision for doubtful
accounts was due to the provision for certain receivables that the Company does
not now expect to collect and the provision for customers with poor credit
history acquired through since discontinued marketing programs.

         At the time of the Company's acquisition of Access One, Access One and
its subsidiaries had approximately $15.0 million of loans outstanding under an
existing credit facility with MCG Finance Corporation. The loans under the
credit facility were secured by a pledge of all of the assets of Access One and
its subsidiaries. In addition, the Company guaranteed the obligations of Access
One and its subsidiaries under the credit facility. The $15.0 million loan was
repaid on October 20, 2000 when certain subsidiaries of the Company entered into
a Credit Facility Agreement with MCG Finance Corporation, providing for a term
loan of up to $20.0 million and a line of credit facility permitting such
subsidiaries to borrow up to an additional $30.0 million. The effectiveness of
the line of credit facility is subject, among other things, to the successful
syndication of that facility. The Credit Facility Agreement subjects the Company
and its subsidiaries to certain restrictions and covenants related to, among
other things, liquidity, per-subscriber-type revenue, subscriber acquisition
costs, leverage ratio and interest coverage ratio requirements. As of June 30,
2001, the Company would have been in default of its long distance subscriber
acquisitions costs covenant but for a waiver from MCG Finance Corporation. The
waiver covered compliance through the second quarter of 2001. In connection with
the waiver and certain other agreements by the lenders under the Credit Facility
Agreement, the Company is issuing warrants to purchase 150,000 shares of its
common stock at $0.68 per share to such lenders. The credit facilities under the
Credit Facility Agreement were extended at the Company's election up to June 30,
2005 for the term loan facility and up to June 30, 2003 for the line of credit
facility. The principal of the term loan is required to be repaid in quarterly
installments of $1.25 million on the last calendar day of each fiscal quarter,
commencing on September 30, 2001. The loans under the Credit Facility Agreement
are collateralized by a pledge of all of the assets of the subsidiaries of the
Company that are parties to that agreement. In addition, the Company has
guaranteed the obligations of those subsidiaries under the Credit Facility
Agreement and related documents. The Company's guarantee subjects the Company to
certain restrictions and covenants, including a prohibition against the payment
of dividends in respect of the Company's equity securities, except under certain
limited circumstances. Upon its execution of the Credit Facility Agreement, the
Company issued warrants to purchase 300,000 shares of its common stock at $4.36
per share, 150,000 of which vested on December 31, 2000 and the balance of which
would have vested if the Company failed to exceed certain EBITDA thresholds for
the fiscal quarter ended March 31, 2001. The Company exceeded the EBITDA
threshold for the quarter ended March 31, 2001 and consequently the balance of
the warrants did not vest. On October 20, 2000, the Company borrowed $20.0
million under the term loan facility, of which approximately $15.0 million was
used to repay the Access One loans.

                                       18

<PAGE>


         The Company believes that its current cash position and the cash flow
expected to be generated from operations will be sufficient to fund its capital
expenditures, working capital and other cash operating and regular debt service
requirements, including marketing and promotional expenditures discussed above,
for at least the next twelve months. However , based on its existing cash and
cash equivalents and its expectations as to future cash flow from operations,
the Company expects that, should AOL elect during the exercise period prior to
September 30, 2001 to sell its shares of the Company's common stock at a price
below $19 per share, the Company will be required to obtain additional financing
to fund a substantial portion of its reimbursement obligations under the AOL
Investment Agreement. While the Company believes that it could obtain such
financing, there can be no assurance that, given current market conditions, the
Company would be able to raise such additional capital on terms acceptable to
the Company. In addition, the Company's use of its cash on hand to satisfy the
AOL reimbursement obligations could impair its ability to continue to implement
its business plan, as could the timing of any cash payments required to be made
by the Company in respect of the various actions against the Company, as
discussed in Note 4 of Notes to Consolidated Financial Statements in this
Report.

RECENT ACCOUNTING PRONOUNCEMENTS

         Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivatives
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivatives
Instruments and Certain Hedging Activities." The standards require an entity
recognize all derivatives as either assets or liabilities measured at fair
value. The accounting for the changes in fair value of a derivative depends on
the use of the derivative. The cumulative effect of adopting these new
accounting standards did not have a material effect on the Company's results of
operations or its financial position for the periods presented in the financial
statements included herein

         The Financial Accounting Standards Board (FASB) Emerging Issues Task
Force (EITF) has issued Abstract No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,"
which addresses how such contracts should be classified and measured by the
Company. Under this issue, contracts that require net-cash settlement would be
initially classified as assets or liabilities, then measured at fair value, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as assets or liabilities.
If contracts classified as assets or liabilities are ultimately settled in
shares, any gains or losses on those contracts should continue to be included in
earnings. This abstract is effective for all contracts that remain outstanding
at June 30, 2001, and presented on that date as a cumulative effect of a change
in accounting principle. The cumulative effect of the adoption of this change in
accounting principal resulted in a noncash charge to operations of $36.8 million
in the quarter ended June 30, 2001.

         In July of 2001, the Financial Accounting Standards Board (FASB) issued
Statements No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets", which eliminate the pooling of interests method of
accounting, establish new criteria for identification of separate intangibles
acquired, and establish the impairment approach rather than amortization for
goodwill. The Company has $191.7 million of net goodwill and $14.4 million of
net identifiable intangible assets as of June 30, 2001 and has recorded $12.6
million of amortization expense in the six months ended June 30, 2001. Effective
January 1, 2002, the Company will no longer be required to record amortization
expense on goodwill, but will instead evaluate these assets for potential
impairment. Management is in the process of reviewing the assets for potential
impairment and, if there is impairment, the Company may incur a cumulative
effect charge of adopting these statements in the first quarter of 2002.

                                * * * * * * *


SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

         Certain of the statements contained herein may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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


                                       19

<PAGE>

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 in the
foregoing Management's Discussion and Analysis and in the Company's Annual
Report on Form 10-K, see Note 1(b) of the Notes to Consolidated Financial
Statements in this Report for important factors that could cause such actual
results to differ materially. The Company undertakes no obligation to update its
forward-looking statements.

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 collectability of its accounts
receivable and the receivability of the carrying values of its long-term assets.
The Company's long-term obligations consist primarily of its own convertible
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.


                                       20


<PAGE>

                           PART II - OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) Exhibits:

             None.


         (b) Reports on Form 8-K:

              The Company filed no Current Reports on Form 8-K during the three
months ended June 30, 2001.









                                       21
<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:    August 13, 2001             By: /s/ Gabriel Battista
                                        ------------------------------------
                                         Gabriel Battista
                                         Chairman of the Board of Directors,
                                         Chief Executive Officer and Director

Date:    August 13, 2001             By: /s/ Edward B. Meyercord, III
                                        ------------------------------------
                                         Edward B. Meyercord, III
                                         President, Chief Financial Officer,
                                         Director and Treasurer

Date:    August 13, 2001             By: /s/ Thomas M. Walsh
                                        ------------------------------------
                                         Thomas M. Walsh
                                         Senior Vice President - Finance










                                       22