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

                       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, 2000

                                       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.COM 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.

     78,445,181  shares of Common  Stock,  par  value of $0.01 per  share,  were
issued and outstanding as of August 11, 2000.

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

<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES

                                      INDEX
<TABLE>
<CAPTION>

                                                                                                                       PAGE

<S>                                                                                                                     <C>
PART I - FINANCIAL INFORMATION:

Item 1.  Consolidated Financial Statements:

         Consolidated Balance Sheets - June 30, 2000 (unaudited)
         and December 31, 1999...............................................................                            3

        Consolidated Statements of Operations - Three and Six Months Ended June 30, 2000 and
        1999 (unaudited).....................................................................                            4

        Consolidated Statement of Stockholders' Equity  - Six Months Ended June 30, 2000
        (unaudited)..........................................................................                            5

        Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999
        (unaudited)..........................................................................                            6

        Notes to Consolidated Financial Statements (unaudited)...............................                            7

Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations............................................................                           10

Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................                           18

PART II  - OTHER INFORMATION:

Item 6. Exhibits and Reports on Form 8K......................................................                           19

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

</TABLE>


                                       2


<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS:

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

<TABLE>
<CAPTION>

                                                                                                 JUNE 30,            DECEMBER 31,
                                                                                                   2000                  1999
                                                                                                -----------           -----------
                                                                                                (UNAUDITED)
<S>                                                                                              <C>                    <C>
                                        ASSETS
Current assets:
   Cash and cash equivalents                                                                     $  89,084              $  78,937
   Accounts receivable, trade, net of allowance for uncollectible accounts of $11,113
     and $5,011, respectively                                                                       57,976                 59,501
   Advances to partitions and notes receivable                                                       3,576                  3,600
   Prepaid expenses and other current assets                                                         2,103                  8,855
                                                                                                 ---------              ---------
       Total current assets                                                                        152,739                150,893
                                                                                                 ---------              ---------

Property and equipment, net                                                                         69,942                 57,335
Intangibles, net                                                                                     1,534                  1,068
Other assets                                                                                         6,667                  5,712
                                                                                                 ---------              ---------
       Total assets                                                                              $ 230,882              $ 215,008
                                                                                                 =========              =========

                  LIABILITIES, CONTINGENCIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses:
      Trade and other                                                                            $  46,001              $  47,965
      Partitions                                                                                     2,621                  1,676
      Taxes and other                                                                                8,479                 14,127
                                                                                                 ---------              ---------
       Total current liabilities                                                                    57,101                 63,768
                                                                                                 ---------              ---------

Convertible debt                                                                                    84,950                 84,985
Deferred revenue                                                                                    17,549                 21,000
                                                                                                 ---------              ---------
       Total liabilities                                                                           159,600                169,753
                                                                                                 ---------              ---------

Commitments and contingencies
Contingent redemption value of common stock                                                         51,668                  5,152
                                                                                                 ---------              ---------
Stockholders' equity:
   Preferred stock - $.01 par value, 5,000,000 shares authorized; no shares issued and                  --                     --
     outstanding
   Common stock - $.01 par value, 300,000,000 shares authorized; 66,972,960 shares
     issued and outstanding                                                                            670                    670
   Additional paid-in capital                                                                      161,864                208,453
   Accumulated deficit                                                                            (126,811)              (139,300)
   Treasury stock, at cost                                                                         (16,109)               (29,720)
                                                                                                 ---------              ---------

       Total stockholders' equity                                                                   19,614                 40,103
                                                                                                 ---------              ---------
       Total liabilities, contingencies and stockholders' equity                                 $ 230,882              $ 215,008
                                                                                                 =========              =========

</TABLE>


          See accompanying notes to consolidated financial statements.

                                       3

<PAGE>
                         TALK.COM 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 JUNE 30,                      ENDED JUNE 30,
                                                     ---------------------------         ---------------------------
                                                        2000              1999              2000              1999
                                                     ---------         ---------         ---------         ---------
<S>                                                  <C>               <C>               <C>               <C>
Sales                                                $ 135,758         $ 117,139         $ 291,817         $ 227,711

Cost of sales                                           88,511            72,557           180,202           146,400
                                                     ---------         ---------         ---------         ---------

Gross profit                                            47,247            44,582           111,615            81,311
                                                     ---------         ---------         ---------         ---------
Operating expenses (income):
    General and administrative expenses                 13,688             8,449            25,866            17,992
    Promotional,  marketing  and  advertising
      expenses                                          32,512            21,193            69,163            35,791
    Depreciation and amortization                        1,986             1,461             3,842             2,912
    Significant other income                                --            (1,500)               --            (2,718)
                                                     ---------         ---------         ---------         ---------
               Total operating expenses                 48,186            29,603            98,871            53,977
                                                     ---------         ---------         ---------         ---------

Operating income (loss)                                   (939)           14,979            12,744            27,334

Interest income (expense), net                             360              (625)              651                32
Other expense, net                                        (312)             (316)             (656)             (994)
                                                     ---------         ---------         ---------         ---------

Income (loss) before income taxes                         (891)           14,038            12,739            26,372
                                                     ---------         ---------         ---------         ---------

Provision for income taxes                                  --                --               250                --
                                                     ---------         ---------         ---------         ---------

Income (loss) before extraordinary gain                   (891)           14,038            12,489            26,372

Extraordinary gain                                          --                --                --            18,997
                                                     ---------         ---------         ---------         ---------

Net income (loss)                                    $    (891)        $  14,038         $  12,489         $  45,369
                                                     =========         =========         =========         =========

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

Basic earnings per share:

   Income (loss) before extraordinary gain           $   (0.01)        $    0.23         $    0.19         $    0.44

   Extraordinary gain                                       --                --                --              0.32
                                                     ---------         ---------         ---------         ---------

   Net income (loss)                                 $   (0.01)        $    0.23         $    0.19         $    0.76
                                                     ---------         ---------         ---------         ---------

   Weighted average common shares outstanding           65,822            60,422            65,563            59,670
                                                     =========         =========         =========         =========
Diluted earnings per share:

  Income (loss) before extraordinary gain            $   (0.01)        $    0.22         $    0.19         $    0.42

  Extraordinary gain                                        --                --                --              0.30
                                                     ---------         ---------         ---------         ---------

  Net income (loss)                                  $   (0.01)        $    0.22         $    0.19         $    0.72
                                                     ---------         ---------         ---------         ---------

  Weighted average common and common
     equivalent shares outstanding                      65,822            63,360            67,334            62,894
                                                     =========         =========         =========         =========

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE SIX MONTHS ENDED JUNE 30, 2000
                                 (IN THOUSANDS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>

                                   COMMON STOCK          ADDITIONAL                              TREASURY STOCK
                                -------------------        PAID-IN        ACCUMULATED        -----------------------
                                SHARES       AMOUNT        CAPITAL          DEFICIT          SHARES           AMOUNT         TOTAL
                                ------       ------      ----------       -----------        ------           ------         -----
<S>                             <C>          <C>          <C>              <C>              <C>              <C>            <C>

Balance, January 1, 2000        66,973        $670        $208,453         $(139,300)        (2,120)         $(29,720)      $40,103
  Net income                       --           --           --               12,489             --                --        12,489
  Exercise of common
    stock options                  --           --          (2,028)               --            316             4,437         2,410
  Proceeds from rights
    exercised                      --           --           1,940                --            653             9,154        11,093
  Issuance of common
   stock  for convertible
   debt                            --           --              15                --              2                20            35
  Contingent redemption
   value of common
   stock                           --           --         (46,516)               --             --                --       (46,516)
                               ------         ----        --------         ---------         ------          --------       -------
Balance, June 30, 2000         66,973         $670        $161,864         $(126,811)        (1,149)         $(16,109)      $19,614
                               ======         ====        ========         =========         ======          --------       -------

</TABLE>


          See accompanying notes to consolidated financial statements.



                                       5

<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                          FOR THE SIX MONTHS
                                                                                            ENDED JUNE 30,
                                                                                      ----------------------------
                                                                                        2000                1999
                                                                                      --------            --------
<S>                                                                                   <C>                 <C>

Cash flows from operating activities:
   Net income                                                                         $ 12,489            $ 45,369
   Adjustment to reconcile net income to net cash provided by (used in)
     operating activities:
            Provision for bad debts                                                      6,204                (232)
            Depreciation and amortization                                                3,842               2,912
            Deferred revenue                                                            (3,451)             (3,700)
            Extraordinary gain
                                                                                            --             (18,997)
     Changes in assets and liabilities, net:
       (Increase) decrease in:
           Accounts receivable, trade                                                   (4,501)                898
           Advances to partitions and notes receivable                                      24               1,582
           Prepaid expenses and other current assets                                     6,752                 112
           Other assets                                                                   (955)              1,676
      Increase (decrease) in:
          Accounts payables and accrued expenses                                        (6,769)            (30,497)
          Other liabilities                                                                 --              (1,850)
                                                                                      --------            --------
                    Net cash provided by (used in) operating activities                 13,635              (2,727)
                                                                                      --------            --------

Cash flows from investing activities:
   Capital expenditures                                                                (16,476)             (2,846)
   Acquisition of intangibles                                                             (515)                 --
   Sale of securities, net                                                                  --              89,649
                                                                                      --------            --------
                    Net cash provided by (used in) investing activities                (16,991)             86,803
                                                                                      --------            --------

Cash flows from financing activities:
   Repayment of margin account indebtedness                                                 --             (49,621)
   Acquisition of convertible debt                                                          --             (65,423)
   Proceeds from exercise of options and warrants                                        2,410              17,705
   Proceeds from exercise of rights                                                     11,093                  --
   AOL investment                                                                           --              55,000
    Acquisition of treasury stock                                                           --              (7,686)
                                                                                      --------            --------
                    Net cash provided by (used in) financing activities                 13,503             (50,025)
                                                                                      --------            --------

Net increase in cash and cash equivalents                                               10,147              34,051
Cash and cash equivalents, beginning of period                                          78,937               3,063
                                                                                      --------            --------
Cash and cash equivalents, end of period                                              $ 89,084            $ 37,114
                                                                                      ========            ========

</TABLE>


          See accompanying notes to consolidated financial statements.



                                       6

<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. BASIC PRESENTATION:

     The consolidated financial statements include the accounts of Talk.com Inc.
and its wholly-owned subsidiaries,  (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 June
30,  2000 and for the  three and six  months  ended  June 30,  2000 and 1999 are
presented as unaudited but in the opinion of management  include all adjustments
necessary to present fairly the information set forth therein. These adjustments
consist solely of normal  recurring  accruals.  The  consolidated  balance sheet
information  for  December  31,  1999 was  derived  from the  audited  financial
statements  included  in the  Company's  Form 10-K,  as amended.  These  interim
financial statements should be read in conjunction with the Form 10-K report, as
amended.  The interim results are not necessarily  indicative of the results for
any future periods.

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 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  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  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 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 will 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, as discussed above.

     AOL did not elect to  exercise  its right to  terminate  the long  distance
exclusivity as of June 30, 2000 and,  accordingly,  the  exclusivity  period for
long distance will continue  through at least June 30, 2001. AOL did provide the
Company with notice that its exclusivity as to wireless services would terminate
on July 1, 2000,  although the Company's  right to offer wireless  services will
continue on a non-exclusive basis.

     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 4 for a discussion of certain  reimbursement  obligations of the
Company in favor of AOL.

                                       7

<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


3. RELATED PARTY TRANSACTIONS:

     On January 5, 1999, Mr. Daniel  Borislow,  a founder of the Company and its
Chairman of the Board and Chief  Executive  Officer,  resigned as a director and
officer of the Company.  The Company entered into various agreements and engaged
in various  transactions  with Mr. Borislow and certain  entities in which he or
his family had an interest.

     In  connection  with Mr.  Borislow's  resignation,  the  Company  paid $1.0
million to Mr.  Borislow,  assigned  certain  automobiles  to him, and continued
certain of his health and medical  benefits and director and officer  insurance.
The Company also agreed that,  so long as Mr.  Borislow  owned  beneficially  at
least two  percent  (2%) of the Common  Stock (on a fully  diluted  basis),  Mr.
Borislow  and  trusts for the  benefit of his  children  would be  entitled  to:
registration  rights with respect to their shares of Common Stock,  the right to
require the Company to use a portion of proceeds from any public or private sale
of debt  securities,  excluding  borrowings  from a  commercial  bank  or  other
financial  institution,  by the Company to  repurchase  debt  securities  of the
Company owned by Mr. Borislow or the trusts for the benefit of his children, and
the right to require the Company to use the proceeds  from the exercise of stock
options by other employees or the exercise of rights, to repurchase Common Stock
owned by Mr. Borislow or the trusts for the benefit of his children. The Company
also agreed that, so long as Mr.  Borislow had such  beneficial  ownership,  the
Company would not, without the prior written consent of Mr. Borislow and subject
to certain exceptions: (a) engage in certain significant corporate transactions,
including the sale or encumbrance of  substantially  all of its assets,  mergers
and consolidations and certain material acquisitions, or, (b) for a period of 18
months from the agreement date, offer or sell any of its Common Stock unless and
until Mr. Borislow and the trusts have sold or otherwise  disposed of all of the
shares of Common Stock held by him on the agreement  date. In turn, Mr. Borislow
terminated  his  employment  with the Company and agreed not to compete with the
Company for at least one year. Mr. Borislow also agreed to guarantee up to $20.0
million of the Company's obligations in connection with the AOL investment noted
above.  As of June 30, 2000, Mr.  Borislow and the two trusts for the benefit of
Mr.  Borislow's  children,  which have the ability to distribute Common Stock to
Mr. Borislow, held less than an aggregate of 2% of the outstanding Common Stock.
Accordingly,  the Company  believes  that the  restrictions  described  above no
longer apply to the Company

     During 1999,  the Company (a) purchased from Mr.  Borislow,  and two trusts
for the benefit of Mr. Borislow's  children,  $85.9 million aggregate  principal
amount  of the  Company's  Convertible  Notes  for $72.3  million  in cash;  (b)
exchanged the remaining $53.7 million principal amount of subordinated  notes of
Communication TeleSystems International d/b/a WorldxChange Communications, which
were  included in other assets at December 31, 1998,  to a trust for the benefit
of Mr. Borislow's  children for $62.5 million aggregate  principal amount of the
Company's  Convertible Notes and (c) purchased $9.0 million aggregate  principal
amount of the Company's Convertible Notes for $6.9 million in Common Stock. Also
during 1999, pursuant to the agreements with Mr. Borislow as described above the
Company purchased from Mr. Borislow approximately 639,000 shares of Common Stock
for approximately  $7.7 million with proceeds from the exercise of stock options
by other employees.

     On January 6, 2000, the Company repurchased from Mr. Borislow real property
previously sold to Mr.  Borislow  constituting  the Company's  facilities in New
Hope, Pennsylvania for $2.5 million.

4. STOCKHOLDERS' EQUITY:

CONTINGENT REDEMPTION VALUE OF COMMON STOCK

     Under the terms of the  Investment  Agreement  with AOL (see Note 2 above),
the Company  agreed to reimburse AOL for losses AOL may incur on the sale of any
of the shares of Company common stock held by AOL during the period from June 1,
1999 through September 30, 2000. The Company has the first right to purchase any
of the shares of Common  Stock  held by AOL 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

                                       8

<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


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.

     By an amendment dated as 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.
Also as of August 2, 2000,  the Company  received a letter  from AOL  confirming
that AOL does not intend to exercise such rights to reimbursement for shortfalls
earlier than December 31, 2000.

     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, 2000, the reimbursement amount would be approximately $51.7 million. At
June 30, 2000, the Company recorded $51.7 million for the contingent  redemption
value of this Common Stock with a corresponding  reduction in additional paid-in
capital.  AOL also has the right on  termination  of long  distance  exclusivity
under the AOL  marketing  agreements  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).  AOL did not elect to terminate the long distance  exclusivity as of
June 30,  2000,  but can so elect as of June 30, 2001 and 2002.  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.  AOL has
agreed  that  it  will   subordinate  its  security   interests  to  permit  the
securitization  of certain future  financings by the Company.  Mr.  Borislow has
agreed  to  guarantee  up  to  $20.0  million  of  the  Company's  reimbursement
obligations under the Investment Agreement with AOL.

5. 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  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.  The Company
believes the  allegations  in the  complaints  are without  merit and intends to
defend the litigations vigorously.  The Company also is a party to certain legal
actions 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.

6. ACQUISITION:

     On August 9, 2000, a wholly owned subsidiary of the Company merged with and
into Access One Communications  Corp., a New Jersey corporation  ("Access One"),
pursuant  to the  Agreement  and Plan of  Merger,  dated as of March  24,  2000,
between  the Company  and Access  One.  As a result of such  merger,  Access One
became a wholly  owned  subsidiary  of the Company  and Access One  stockholders
received  0.571428  shares of the  Company's  common  stock in exchange for each
share of Access One common stock held by such stockholders at the effective time
of the Merger,  or 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.  Access One is a
private,  local  telecommunications  service  provider  to  nine  states  in the
southeastern  United States. The merger will be accounted for under the purchase
method of accounting.

                                       9

<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

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

OVERVIEW

         Talk.com Inc.,  through its subsidiaries,  provides  telecommunications
services to  residential  and business  customers  throughout the United States,
primarily through its electronic billing and customer service platform. Talk.com
Inc. and its  subsidiaries are sometimes  together  referred to as the "Company"
and as "Talk.com".

         The  Company's   telecommunications   service  offerings  include  long
distance and local outbound  service,  inbound  toll-free  service and dedicated
private line services for data. The Company  announced late in 1999 that,  given
the new regulatory  opportunities that have developed,  it planned to expand its
product mix by also offering local service  bundled with long distance  service.
On August 9, 2000,  the Company  merged with and into Access One  Communications
Corp. in a statutory  merger for  approximately  14.3 million  shares of Company
common stock (including assumed options and warrants).  Access One is a private,
Florida-based,  local telecommunications  service provider to nine states in the
southeastern United States. In connection with the acquisition agreement entered
into with Access One in March 2000, the Company  entered into an agreement under
which  Access  One  agreed  to  provide  certain  telecommunications   services,
including local  services,  to the Company.  Using this  agreement,  the Company
recently  began offering local  telecommunication  service in Florida,  Georgia,
North Carolina, South Carolina,  Kentucky,  Louisiana,  Mississippi,  Tennessee,
Alabama and New York in the second quarter of 2000. The Company is also offering
a bundle of long  distance  and  local  service  to small  business  and  select
residential  customers in the nine  southeastern  states serviced by Access One,
through the Company's marketing partnerships and new direct channels.

         The Company  believes that it has an opportunity to capture  additional
market share and  accelerate  future  growth  through its offerings of local and
bundled local and long distance telecommunications  services. In connection with
its rollout of local services,  the Company  anticipates  that its marketing and
promotional expenditures will continue to increase on an absolute basis and as a
percentage of revenue  during the  remainder of the year.  With the extension of
the  Company's  long  distance  exclusivity  period with AOL until at least June
2001,  the Company also will continue to expend  significant  marketing  dollars
with AOL.  Accordingly,  the Company  believes  that the  projected  increase in
marketing and advertising  expenditures is expected to significantly  reduce the
Company's earnings in 2000.


                                       10

<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>

                                                 FOR THE THREE MONTHS               FOR THE SIX MONTHS
                                                    ENDED JUNE 30,                    ENDED JUNE 30,
                                                -----------------------            ---------------------
                                                  2000            1999              2000           1999
                                                -------          ------            ------         ------
<S>                                            <C>                <C>              <C>             <C>
Sales                                             100.0%          100.0%           100.0%          100.0%
Cost of sales                                      65.2            61.9             61.7            64.3
                                                 ------          ------           ------          ------
Gross profit                                       34.8            38.1             38.3            35.7
                                                 ------          ------           ------          ------
Operating expenses (income):
    General and administrative expenses            10.1             7.2              8.9             7.9
    Promotional, marketing and
    expenses                                       23.9            18.1             23.7            15.7
    Depreciation and amortization                   1.5             1.3              1.3             1.3
    Significant other income                         --            (1.3)              --            (1.2)
                                                 ------          ------           ------          ------
                  Total operating expenses         35.5            25.3             33.9            23.7
                                                 ------          ------           ------          ------
Operating income                                    (.7)           12.8              4.4            12.0

Interest income (expense), net                       .3            (.5)               .2              --

Other income (expense), net                         (.3)           (.3)              (.2)            (.4)
                                                 ------          ------           ------          ------
Income before income taxes                          (.7)          12.0               4.4            11.6
Provision for income taxes                           --             --                --              --
                                                 ------          ------           ------          ------
Income before extraordinary gain                    (.7)          12.0               4.4            11.6
Extraordinary gain                                   --             --                --             8.3
                                                 ------          ------           ------          ------
Net income                                          (.7)%          12.0%             4.4%           19.9%
                                                 ======          ======           ======          ======

</TABLE>


QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999

         Sales

         Sales  increased by 16.0% to $135.8  million for the quarter ended June
30, 2000 from $117.1 million for the quarter ended June 30, 1999.  This increase
was  primarily  a result of an  increase  in the  number  of  online  customers,
increased revenue per online customer and sales from an international  wholesale
business that began in the third  quarter of 1999.  The increase in online sales
was  partially  offset by a decrease in the  Company's  other  sales,  including
partition  sales,  as the Company has continued to focus primarily on developing
its online sales and customer base.  The addition of new marketing  partners has
contributed to the growth in the online business.  While the Company believes it
offers competitively  priced services,  sales could be adversely affected by the
intense  competition in this  industry.  In addition,  the Company's  ability to
provision  customers,  which is adversely affected by PIC freezes implemented by
the local  telephone  companies,  directly  affects sales.  Also, as part of the
Company's focus on its higher margin core business of domestic long distance and
local telecommunication services,  the Company expects to exit the international
wholesale business due to the low gross profit margins.

         Beginning  in the  second  quarter  of 2000,  there  was a  significant
reduction in the principal marketing opportunity provided to the Company by AOL,
which has resulted in a decline in gross additions of new online  customers.  In
addition,  the Company instituted new collection procedures in the first quarter
of 2000, which the Company believes contributed to customer  terminations during
the  introduction  period at a rate greater than the Company's  historical churn
experience.  With a reduction in the online sales from the  interruption  of its
primary AOL marketing channel,  the increased churn and the continued decline in
other sales (including the Company's  reduction of its  international  wholesale
business),  the Company  experienced  a reduction  in total sales for the second
quarter ended June 30, 2000  compared to the first quarter ended March  31,2000.
In addition to the matters  discussed above,  there can be no assurance that the
Company will continue to increase sales on a quarter-to-quarter  or year-to-year
basis.

                                       11

<PAGE>


                         TALK.COM INC. AND SUBSIDIARIES

         A  significant  percentage  of the  Company's  revenues in the quarters
ended June 30, 2000 and 1999 were derived from long distance  telecommunications
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
non-AOL  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 do not expire until June 30, 2003,  AOL has
the right in each year  beginning in 2000, to elect,  on or before May 1 of such
year, to permit others to market long distance telecommunications services after
June  30 of  such  year to  AOL's  subscribers.  Notwithstanding  any  such  AOL
election,  the  Company's  rights to  continue  to market  its  services  to AOL
subscribers on a non-exclusive  basis,  but with significant  marketing  rights,
would  continue  until June 30, 2003.  AOL did not exercise its right as to 2000
and, accordingly, the exclusivity period for long distance will continue through
at least June 2001 and the  Company  will be  obliged  to make  fixed  quarterly
payments  during the year ending June 30, 2001 of at least $15.0 million  ($18.0
million in the last two quarters of 2000 before a $1 million  credit from AOL in
the third  quarter) to AOL. AOL did elect to terminate the  Company's  exclusive
right to offer wireless services to AOL subscribers,  but the Company's right to
offer  wireless  services will continue on a  non-exclusive  basis.  The Company
plans to continue to aggressively  market its services to AOL  subscribers,  and
also plans,  as discussed  above,  to increase its efforts to expand its non-AOL
base of online customers.

         Cost of Sales

         Cost of sales  increased by 21.9% to $88.5 million in the quarter ended
June 30,  2000 from $72.6  million in the  quarter  ended  June 30,  1999.  This
increase  was mainly due to an increase  in network  costs  associated  with the
increase in AOL sales this quarter as compared to the same quarter last year and
higher network costs associated with the international  wholesale  business.  In
addition,  the Company provided $2.8 million more in bad debt expense during the
quarter ended June 30, 2000 over the same quarter last year. This increase is to
provide for certain aged receivables  that are now deemed not collectible.  As a
percentage  of sales,  cost of sales has increased to 65.2% as compared to 61.9%
for the same quarter last year.  The increase was primarily due to the increased
network costs and bad debt reserves, as noted above.

         Gross Profit

         Gross  profit decreased to 34.8% of sales in the quarter ended June 30,
2000 from 38.1% in the quarter  ended June 30,  1999.  The decrease in the gross
profit  percentage  was  primarily due to higher  network  costs and  additional
provisions for bad debt, as noted above. Due to higher network costs,  increased
bad debt expense,  lower gross profit on the international  wholesale  business,
and reduced  profits on other  sales,  as well as the  intensification  of price
competition for the Company's  products,  the Company may continue to experience
downward pressure on gross profits in the future.

         General and Administrative Expenses

         General and administrative expenses increased by 63.1% to $13.7 million
in the quarter  ended June 30, 2000 from $8.4 million in the quarter  ended June
30,  1999.  As a  percentage  of  sales,  general  and  administrative  expenses
increased  to 10.1 % for the  quarter  ended  June 30,  2000  from 7.2 % for the
quarter ended June 30, 1999.  The increase was due primarily to increased  costs
associated  with  additional  personnel  hired to support the Company's  growth,
including its expansion  into the local  services  business,  and an increase in
costs for professional services.

         Promotional, Marketing and Advertising Expenses

         During the quarter  ended June 30,  2000,  the Company  incurred  $32.5
million in promotional,  marketing and advertising expenses as compared to $21.2
million in the quarter ended June 30, 1999. This represents an increase of 53.3%
over the same period last year, and relates to the Company's continued effort to
expand its online  customer base as well as higher  promotional  expenses and an
increase in fixed payments to AOL. The Company  expects that these expenses will
continue to increase as the Company implements its plans noted above to

                                       12

<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES


aggressively  pursue local  subscribers  and line growth,  particularly  non-AOL
customers.  In addition,  fixed  payments to AOL for the quarter  ended June 30,
2000 increased by $2.0 million over the same quarter in 1999.  Fixed payments to
AOL in the third and fourth quarters of 2000,  after taking into account a third
quarter credit from AOL and increased  payments in both quarters of $3.0 million
for AOL's  agreement to provide  certain  additional  marketing in the last five
months  of 2000,  will be $17.0 and $18.0  million,  respectively.  Promotional,
marketing and  advertising  expense for the quarter ended June 30, 2000 compared
to the  quarter  ended  March 31,  2000  were  reduced  due to less  advertising
associated with AOL because of the second quarter reduction in the principal AOL
marketing  opportunity,  but were  offset by the  costs  associated  with  local
marketing.

         Depreciation and Amortization

         Depreciation  and  amortization for the quarter ended June 30, 2000 was
$2.0 million,  an increase of 35.9% compared to $1.5 million for the same period
in 1999.  This  increase is related to the  continued  purchase of property  and
equipment to support the Company's ongoing growth.

         Significant Other Income

         During the  quarter  ended June 30,  1999,  the  Company  sold the last
remaining division of TSFL Holdings, Inc. (formerly Symetrics Industries, Inc.),
resulting in a gain of $1.5 million.

         Interest Income (Expense), net

         Net interest income was $360,000 for the quarter ended June 30, 2000 as
compared  to net  interest  expense of $625,000  for the quarter  ended June 30,
1999.  This  represents an increase of $985,000 from the second  quarter of last
year due to the higher level of cash and cash  equivalents and lower debt levels
in the 2000 period.  Net interest income  consists  primarily of interest income
earned on cash and cash  equivalents  offset by interest  expense related to the
Company's convertible debt.

         Other Expense, net

         Net other  expense was $312,000 for the quarter  ended June 30, 2000 as
compared to $316,000 for the quarter ended June 30, 1999.

         Provision for Income Taxes

         The Company did not record a provision  for income taxes in the quarter
ended June 30, 2000.  In the quarter  ended March 31, 2000 the Company  recorded
$250,000  related to the expected payment of federal income taxes on alternative
minimum taxable income this fiscal year.  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.

SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999

         Sales

         Sales  increased  by 28.2% to $291.8  million for the six months  ended
June 30, 2000 from $227.7  million for the six months ended June 30, 1999.  This
increase  was  primarily  a  result  of an  increase  in the  number  of  online
customers,  sales from an  international  wholesale  business  that began in the
third quarter of 1999, and increased  revenue per online customer.  The increase
in online sales was partially offset by a decrease in the Company's other sales,
including  partition  sales,  as the Company has continued to focus primarily on
developing  its online sales and customer  base.  The addition of new  marketing
partners has contributed to the growth in the online business. While

                                       13

<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

the Company believes it offers  competitively  priced  services,  sales could be
adversely affected by the intense competition in this industry. In addition, the
Company's  ability to provision  customers,  which is adversely  affected by PIC
freezes implemented by the local telephone companies, directly affects sales.

         Beginning  in the  second  quarter  of 2000,  there  was a  significant
reduction in the principal marketing opportunity provided to the Company by AOL,
which has resulted in a decline in gross additions of new online  customers.  In
addition,  the Company instituted new collection procedures in the first quarter
of 2000, which the Company believes contributed to customer  terminations during
the  introduction  period at a rate greater than the Company's  historical churn
experience.  With a reduction in the online sales from the  interruption  of its
primary AOL marketing channel,  the increased churn and the continued decline in
other sales (including the Company's  reduction of its  international  wholesale
business),  the Company  experienced  a reduction  in total sales for the second
quarter.  In addition to the matters discussed above,  there can be no assurance
that the Company  will  continue to increase  sales on a  quarter-to-quarter  or
year-to-year basis.

         A significant  percentage  of the Company's  revenues in the six months
ended June 30, 2000 and 1999 were derived from long distance  telecommunications
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
non-AOL  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 do not expire until June 30, 2003,  AOL has
the right in each year  beginning in 2000, to elect,  on or before May 1 of such
year, to permit others to market long distance telecommunications services after
June  30 of  such  year to  AOL's  subscribers.  Notwithstanding  any  such  AOL
election,  the  Company's  rights to  continue  to market  its  services  to AOL
subscribers on a non-exclusive  basis,  but with significant  marketing  rights,
would  continue  until June 30, 2003.  AOL did not exercise its right as to 2000
and, accordingly, the exclusivity period for long distance will continue through
at least June 2001 and the  Company  will be  obliged  to make  fixed  quarterly
payments  during the year ending June 30, 2001 of at least $15.0 million  ($18.0
million in the last two quarters of 2000 before a $1.0  million  credit from AOL
in the third quarter) to AOL. AOL did elect to terminate the Company's exclusive
right to offer wireless services to AOL subscribers,  but the Company's right to
offer  wireless  services will continue on a  non-exclusive  basis.  The Company
plans to continue to aggressively  market its services to AOL  subscribers,  and
also plans,  as discussed  above,  to increase its efforts to expand its non-AOL
base of online customers.

         Cost of Sales

         Cost of sales  increased by 23.1 % to $180.2  million in the six months
ended June 30, 2000 from $146.4  million in the six months  ended June 30, 1999.
This increase was due to the overall  increase in sales for the six months ended
June 30,  2000 as compared to the same  period  last year.  As a  percentage  of
sales,  cost of sales for the six months in 2000  decreased to 61.7% as compared
to 64.3% for the same period last year.  The decrease was primarily due to lower
network  usage costs for services on the  Company's  OBN network on a per minute
basis and lower  partition  costs due to the decrease in other sales,  offset by
increased bad debt and by higher network costs associated with the international
wholesale business, as noted above.

         Gross Profit

         Gross  profit  increased to 38.3% of sales in the six months ended June
30, 2000 from 35.7% in the six months ended June 30,  1999.  The increase in the
gross profit  percentage  was primarily due to lower network usage costs for OBN
services on a per minute basis and lower  partition costs due to the decrease in
other sales, as noted above. However, due to higher network costs, increased bad
debt expense and reduced profits on other sales, as well as the  intensification
of price  competition for the Company's  products,  the Company may continue  to
experience downward pressure on gross profits in the future.

                                       14

<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

          General and Administrative Expenses

          General  and  administrative  expenses  increased  by  43.9%  to $25.9
million in the six  months  ended  June 30,  2000 from $18.0  million in the six
months ended June 30, 1999. As a percentage of sales, general and administrative
expenses increased to 8.9% for the six months ended June 30, 2000 from 7.9 % for
the six months  ended June 30, 1999.  The  increase  was due  primarily to costs
associated with additional  personnel hired to support the Company's  continuing
growth, including its expansion into the local services business.

         Promotional, Marketing, and Advertising Expenses

         During the six months ended June 30, 2000,  the Company  incurred $69.2
million in promotional,  marketing and advertising expenses as compared to $35.8
million in the six months ended June 30, 1999.  This  represents  an increase of
93.3% over the same period last year,  and  relates to the  Company's  continued
effort to expand its online customer base as well as higher promotional expenses
and an increase in the fixed  payment to AOL.  The  Company  expects  that these
expenses  will  continue to increase as the Company  implements  its plans noted
above  to   aggressively   pursue  new   local   subscribers  and  line  growth,
particularly  non-AOL customers.  In addition,  fixed  payments to  AOL  for the
six months ended June 30, 2000 increased by $4.0 million over the same period in
1999.  Fixed  payments  to AOL in the third and forth  quarters  of 2000,  after
taking into account a third quarter  credit from AOL and  increased  payments in
both quarters of $3.0 million for AOL's agreement to provide certain  additional
marketing  in the last  five  months of 2000,  will be $17.0 and $18.0  million,
respectively.

         Depreciation and Amortization

         Depreciation  and  amortization  for the six months ended June 30, 2000
was $3.8  million,  an increase of 31.9%  compared to $2.9  million for the same
period in 1999.  This increase is related to the continued  purchase of property
and equipment to support the Company's ongoing growth.

         Significant Other Income

         During  the six months  ended  June 30,  1999,  the  Company  sold TSFL
Holdings,  Inc. (formerly Symetrics  Industries,  Inc.),  resulting in a gain of
$2.7 million.

         Interest Income (Expense), net

         Net interest income was $651,000 for the six months ended June 30, 2000
as  compared  to $32,000  for the six months  ended  June 30,  1999.  This is an
increase  of $619,000  from the six months of last year due to higher  levels of
cash and cash equivalents and lower debt levels in the 2000 period. Net interest
income consists primarily of interest income earned on cash and cash equivalents
offset by interest expense related to the Company's convertible debt.

         Other Expense, net

         Net other  expense was  $656,000 for the six months ended June 30, 2000
as compared to $994,000 for the six months ended June 30, 1999.  This represents
a 34.0% decrease compared to the six months of last year.

         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 this fiscal  year.  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.

                                       15

<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

         Extraordinary Gain

         During  the six months  ended June 30,  1999 the  Company  recorded  an
extraordinary  gain of $19.0  million  from  the  acquisition  of the  Company's
convertible debt at a discount from its aggregate principal amount.

LIQUIDITY AND CAPITAL RESOURCES

     As of June  30,  2000,  the  Company  had  $89.1  million  of cash and cash
equivalents  and $58.0 million in net trade accounts  receivable.  The Company's
working capital was $95.6 million at June 30, 2000 and $87.1 million at December
31,  1999.  This  increase  in  working  capital is  primarily  a result of cash
generated  from the  Company's  operations  and the receipt of $11.1  million in
connection  with the exercise of outstanding  Common Stock rights prior to their
expiration  in  February  2000,  offset  in part by  $16.5  million  in  capital
expenditures for the purchase of property and equipment.

     Net cash  provided by operating  activities  was $13.6  million for the six
months  ended June 30,  2000.  Net cash used in  operating  activities  was $2.7
million for the six months  ended June 30,  1999.  For the six months ended June
30,  2000,  the  major  contributors  to the  net  cash  provided  by  operating
activities were net income of $12.5 million,  a decrease in prepaid expenses and
other current assets of $6.8 million and  adjustments to net income for non-cash
items of $6.6 million.  This was offset by increases in both net trade  accounts
receivable and other assets of $4.5 million and $1.0 million,  respectively, and
a decrease in accounts payable and accrued expenses of $6.8 million. For the six
months ended June 30, 1999,  net cash used in  operating  activities  was mainly
generated  by a  reduction  in accounts  payable  and accrued  expenses of $32.4
million and an adjustment for the  extraordinary  gain of $19.0 million recorded
from the acquisition of the Company's  convertible  debt offset by net income of
$45.4 million and decreases in several other assets of $4.3 million.

     Net cash used in investing activities of $17.0 million related primarily to
the  purchase of property  and  equipment  during the six months  ended June 30,
2000.  For the six months ended June 30, 1999 the net cash provided by investing
activities was mainly from the sale of marketable securities of $89.6 million.

     The $13.5  million net cash  provided by financing  activities  for the six
months  ended June 30, 2000 was  received  from the  exercise of employee  stock
options and common  stock  purchase  rights.  For the six months  ended June 30,
1999,  the net cash used in  financing  activities  totaled  $50.0  million.  On
January  5,  1999,  pursuant  to an  Investment  Agreement  between  AOL and the
Company,  AOL made a significant  equity  investment  in the Company,  acquiring
4,121,372  shares of Common Stock for $55.0 million in cash and the surrender of
rights to acquire up to  5,076,016  shares of Common  Stock  pursuant to various
warrants held by AOL. Additional  financing  activities  generated $10.0 million
from the  exercise of employee  stock  options.  These  activities  in 1999 were
offset by the acquisition of convertible debt of $65.4 million and the repayment
of margin account indebtedness of $49.6 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.  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  reimbursement  obligation at the closing price of
Company  common stock as of August 10, 2000, the  reimbursement  amount would be
approximately  $53.8  million.  AOL also has the right,  on  termination  of the
Company's long distance  exclusivity under its marketing  agreement with AOL, 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-

                                       16

<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

year  promissory  note of the Company if the  repurchase  price exceeds the then
current valuation of the warrants being purchased).  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. Mr. Daniel Borislow, former
Chairman of the Board and Chief Executive Officer of the Company,  has agreed to
guarantee up to $20.0 million of the Company's  reimbursement  obligations under
the Investment  Agreement with AOL. By an amendment  dated as 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. Also as of August 2, 2000, the Company  received a letter
from AOL  confirming  that AOL  does not  intend  to  exercise  such  rights  to
reimbursement for shortfalls earlier than December 31, 2000.

     Except with respect to  receivables  from  international  wholesale  sales,
which are conducted with a small number of international  wholesale  purchasers,
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 Company  maintains  reserves for  potential
credit  losses  and,  to date,  such  losses  have  been  within  the  Company's
expectations.

     In connection  with the Company's  acquisition of Access One  Communication
Corp.  ("Access One"), the Company negotiated an extension to August 31, 2000 of
loans  under an  existing  credit  facility  by MCG  Finance  Corporation  ("MCG
Finance")  to  Access  One and its  subsidiaries.  The loans  under  the  credit
facility  have been  secured  by a pledge of all of the assets of Access One and
its  subsidiaries.  In addition,  the Company has guaranteed the  obligations of
Access One and its subsidiaries under the credit facility.  The loans under that
credit facility total $15.0 million in aggregate  principal amount.  The Company
intends to refinance the loans under the credit facility;  however, there can be
no  assurances  that the Company  will be able to obtain new  financing on terms
acceptable to it to permit the refinancing of those loans.

     The  Company  does  not,  and has not  historically,  required  significant
amounts of working capital for its day-to-day  operations.  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 requirements,  including the increased  marketing and promotional
expenditures  discussed above, for at least the next twelve months.  The Company
also believes that,  assuming the current market price of its common stock,  its
existing cash and cash  equivalents  and its cash flow from  operations  will be
sufficient to fund any reimbursement amount in the event that AOL elects to sell
its  shares of the  Company's  common  stock at a price  below $19 per share and
that,  alternatively,  it has the ability to obtain the  necessary  financing to
fund its obligations under the AOL Investment Agreement. Should the Company seek
to raise  additional  capital,  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.

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 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,  important  factors  that could  cause such  actual  results to differ
materially  include,   among  others,  adverse  developments  in  the  Company's
relationship  with  AOL  or  its  other  marketing  partners,   increased  price
competition  for long distance and local  services,  failure of the marketing of
long distance and local services under its agreement with its various  marketing
partners  and its  direct  marketing  channels,  attrition  in the number of end
users,

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<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

a failure of the Company to successfully integrate the operations of Access One,
a  failure  of the  Company's  new local  services  and  bundled  local and long
distance services  initiative and changes in government  policy,  regulation and
enforcement.  The Company undertakes no obligation to update its forward-looking
statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES 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  recoverability  of the  carrying  values  of its  long-term
assets.  The  Company's  long-term  obligations  consist  primarily  of its  own
convertible  notes.  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.





                                       18

<PAGE>

                         TALK.COM INC. AND SUBSIDIARIES

                           PART II - OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits:

                 10.1   Amendment Number 4 effective as of June 30, 2000, by and
                        among Talk.com Holding Corp., Talk.com Inc. and America
                        Online, Inc.++

                 10.2   2000 Stock  Option Plan  (Incorporated  by  reference to
                        Exhibit 10.31 to the Company's Registration Statement on
                        Form S-4 (No. 333-40980)

                 10.3   Amendment Number 5  effective  as  of August 1, 2000, by
                        and among  Talk.com  Holding  Corp.,  Talk.com  Inc. and
                        America Online, Inc.++

                 11     Computation of Net Income Per Share

                 27     Financial Data Schedule

         ++  Confidential  treatment has  been  requested  for  portions of this
         exhibit.

         (b)  Reports on Form 8-K:

                  On April 5, 2000 the  Company  filed a Current  Report on Form
              8-K  reporting  that the Company had entered into an agreement and
              plan of merger with Access One  Communications  Corp.








                                       19

<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.COM INC.


Date:    August 14, 2000                        By: /s/ Gabriel Battista
                                                    ----------------------------
                                                    Gabriel Battista
                                                    Chief Executive Officer

Date:    August 14, 2000                        By: /s/ Edward B. Meyercord, III
                                                   -----------------------------
                                                        Edward B. Meyercord, III
                                                        Chief Financial Officer

Date:    August 14, 2000                        By: /s/ Janet C. Kirschner
                                                   -----------------------
                                                        Janet C. Kirschner
                                                        Controller



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