UNITED STATES
                       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  AND
     EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 1997.

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

For the transition period from            to

Commission file number 0 - 26728

                             Tel-Save Holdings, Inc.
             (Exact name of registrant as specified in its charter)

                                    Delaware
         (State or other jurisdiction of incorporation or organization)


                                   23-2827736
                      (I.R.S. Employer Identification No.)


                       6805 Route 202, New Hope, PA 18938
               (Address of principal executive offices - Zip code)


      Registrant's telephone number, including area code: 215-862-1500



Former  name,  former  address and former  fiscal  year,  if changes  since last
report.

Indicate by check 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

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:


Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be  filed by  Section  12,13,  or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court

                                               Yes         No

APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding
of each of the issuer's  classes of common stock,  as of the latest  practicable
date.

Common Stock, $.01 par value,  66,785,515 shares  outstanding as of November 10,
1997.



<PAGE>



                             TEL-SAVE HOLDINGS, INC.
                                    FORM 10-Q
                               SEPTEMBER 30, 1997

                                TABLE OF CONTENTS




PART I - FINANCIAL INFORMATION

     Item 1. Financial Statements

              Consolidated Balance Sheets as of September 30, 1997 and
                December 31, 1996                                              3

              Consolidated Statements of Income for the three and nine
                months ended September 30, 1997 and 1996                       4

              Consolidated  Statement of Stockholders'  Equity for the
                nine months ended September 30, 1997                           5

              Consolidated  Statements  of Cash  Flows  for  the  nine
                months ended September 30, 1997 and 1996                       6

              Notes to Consolidated Financial Statements                       7

     Item 2. Management's   Discussion   and  Analysis  of  Financial
                Condition and Results of Operations                           13

PART II - OTHER INFORMATION

              Items 1 - 6                                                     23

              Signatures                                                      25

                                 -2-

<PAGE>



PART I - FINANCIAL INFORMATION
   ITEM 1. FINANCIAL STATEMENTS

                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT FOR SHARE DATA)


<TABLE>
<CAPTION>
                                                                                SEPTEMBER 30,     December 31,
                                                                                    1997              1996
<S>                                                                              <C>                <C>      
ASSETS:
CURRENT:
   Cash and cash equivalents                                                     $ 166,102          $   8,023
   Marketable securities                                                             6,666            149,237
   Accounts receivable, trade net of allowance for uncollect
      ible accounts of $3,064 and $987, respectively                                44,388             19,971
   Advances to partitions and note receivables                                      40,568             13,410
   Due from broker                                                                       -                867
   Prepaid AOL marketing costs - current                                            53,705                  -
   Prepaid  expenses and other current assets                                       16,062             10,377
                                                                                 ---------           --------
       TOTAL CURRENT ASSETS                                                        327,491            201,885
Property and equipment, net of accumulated depreciation of
   $2,674 and $499, respectively                                                    55,349             30,097
Intangibles, net of accumulated amortization of $1,915 and
   $3,787, respectively                                                             23,032             21,102
Investment in STF notes                                                            155,409                  -
Prepaid AOL marketing costs                                                         30,818                  -
Other assets                                                                        14,718              3,924
                                                                                 ---------           --------
        TOTAL ASSETS                                                              $606,817           $257,008
======================================================================  ================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses:
   Trade and other                                                                $ 24,524            $17,812
   Partitions                                                                        9,037              4,398
   Sales and excise taxes payable                                                    1,790              1,592
   Other                                                                             3,054              1,619
Securities sold short, at cost to purchase                                               -                867
                                                                                 ---------            -------
        TOTAL CURRENT LIABILITIES                                                   38,405             26,288
4 1/2% convertible subordinated notes due 2002                                     300,000                  -
                                                                                 ---------            -------
        TOTAL LIABILITIES                                                          338,405             26,288
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
   Preferred stock, $.01 par value, 5,000,000 shares autho
      rized; no shares outstanding                                                       -                  -
   Common stock - $.01 par value, 100,000,000 authorized;
      65,778,823 and 62,237,998 issued, respectively                                   658                622
   Additional paid-in capital                                                      247,986            210,616
   Retained earnings                                                                24,328             24,042
   Treasury stock                                                                  (4,560)            (4,560)
                                                                                 ---------           --------
        TOTAL STOCKHOLDERS' EQUITY                                                 268,412            230,720
                                                                                 ---------           --------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                $606,817           $257,008
======================================================================  ================== ==================
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       -3-

<PAGE>



                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                    (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
                                               FOR THE THREE MONTHS     FOR THE NINE MONTHS
                                                ENDED SEPTEMBER 30,      ENDED SEPTEMBER 30,
                                                -------------------      -------------------
                                                 1997      1996           1997         1996
                                                 ----      ----           ----         ----
<S>                                           <C>         <C>          <C>          <C>      
SALES                                         $  80,314   $  60,079    $  226,506   $ 168,159
COST OF SALES                                    78,217      51,756       224,298     145,617
                                              ---------   ---------    ----------   ---------
GROSS PROFIT                                      2,097       8,323         2,208      22,542
SELLING, GENERAL AND ADMINIS
   TRATIVE                                        5,340       2,452        13,293       7,244
                                              ---------   ---------    ----------   ---------
OPERATING INCOME (LOSS)                          (3,243)      5,871       (11,085)     15,298
OTHER INCOME, NET                                 4,425       5,416        11,554       7,923
                                              ---------   ---------    ----------   ---------
INCOME BEFORE PROVISION FOR
   INCOME TAXES                                   1,182      11,287           469      23,221
PROVISION FOR INCOME TAXES                          461       4,255           183       8,754
                                              ---------   ---------    ----------   ---------
NET INCOME                                    $     721   $   7,032    $      286   $  14,467
=========================================== =========== ===========  ============ ===========
NET INCOME PER SHARE -
   PRIMARY                                    $     .01   $     .11    $        -   $     .27
=========================================== =========== ===========  ============ ===========
WEIGHTED AVERAGE COMMON
   AND COMMON EQUIVALENT
   SHARES OUTSTANDING - PRIMARY                  68,966      63,397        67,239      54,538
=========================================== =========== ===========  ============ ===========
NET INCOME PER SHARE - FULLY
   DILUTED                                    $     .01   $     .11    $        -   $     .26
=========================================== =========== ===========  ============ ===========
WEIGHTED AVERAGE COMMON
   AND COMMON EQUIVALENT
   SHARES OUTSTANDING - FULLY
   DILUTED                                       70,065      64,740        69,119      56,178
=========================================== =========== ===========  ============ ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       -4-

<PAGE>



                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
                                   (UNAUDITED)
                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                           Common Stock          Additional                           Treasury Stock
                                    --------------------------     Paid-in       Retained      ------------------------------
                                       Shares        Amount        Capital       Earnings       Shares         Amount     Total
                                       ------        ------        -------       --------       ------         ------     -----

<S>                                    <C>             <C>          <C>         <C>             <C>             <C>       <C>     
BALANCE, JANUARY 1, 1997               62,238          $622         $210,616    $24,042         (428)           $(4,560)  $230,720
                                                                                                             
NET INCOME                                  -             -                -        286             -                 -        286
                                                                                                             
ISSUANCE OF WARRANTS TO                                                                                      
   AOL                                      -             -            9,100          -             -                 -      9,100
                                                                                                             
ISSUANCE OF COMMON STOCK                  141             1            2,217          -             -                 -      2,218
                                                                                                             
EXERCISE OF COMMON STOCK                                                                                     
   WARRANTS                             1,915            20            8,939          -             -                 -      8,959
                                                                                                             
EXERCISE OF COMMON STOCK                                                                                     
   OPTIONS                              1,485            15            6,891          -             -                 -      6,906
                                                                                                             
PURCHASE OF COMMON STOCK                                                                                     
   WARRANTS                                 -             -           (4,400)          -             -                -     (4,400)
INCOME TAX BENEFIT RELATED                                                                                   
    TO EXERCISE OF COMMON                                                                                    
    STOCK OPTIONS AND WAR                                                                                    
    RANTS                                   -             -           14,623          -             -                 -     14,623
                                    ---------  ------------ ----------------  ---------  ------------ ----------------- -----------
                                                                                                             
BALANCE, SEPTEMBER 30,                                                                                       
    1997                               65,779          $658         $247,986    $24,328         (428)          $(4,560)   $268,412
=================================== =========  ============ ================  =========  ============ ================= ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       -5-

<PAGE>



                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                     FOR THE NINE MONTHS
                                                                                     ENDED SEPTEMBER 30,
                                                                                     -------------------
                                                                                    1997              1996
                                                                                    ----              ----
<S>                                                                             <C>               <C>     
Cash flows from operating activities:
Net income                                                                       $   286          $ 14,467
Adjustment to reconcile net income to net cash (used in)
   provided by operating activities:
   Unrealized (gain) loss on securities sold short and market
   able securities                                                                  (324)                2
   Provision for bad debts                                                         1,952                23
   Depreciation and amortization                                                   4,466             1,733
   Charge for customer acquisition costs                                          11,550                 -
   AOL marketing costs                                                            25,141                 -
   Deferred credits                                                                    -               120
   Income tax benefit related to warrants                                         14,623                 -
   (Increase) decrease in:
      Accounts receivable - trade                                                (26,494)           (2,991)
      Advances to partitions and note receivables                                (27,158)          (11,270)
      Prepaid expenses and other current assets                                  (14,910)           (2,195)
      Prepaid AOL marketing costs                                               (100,564)                -
      Other assets                                                               (10,794)           (1,921)
   Increase (decrease) in:
      Accounts and partition payables and accrued expenses                        13,109             8,757
      Income taxes payable                                                             -             4,914
                                                                                --------           -------
        Net cash (used in) provided by operating activities                     (109,117)           11,639
                                                                                --------           -------
Cash flows from investing activities:
   Acquisition of intangibles                                                     (4,328)           (1,811)
   Capital expenditures                                                          (27,427)          (20,006)
   Securities sold short                                                            (867)           (1,100)
   Due from broker                                                                   867             1,100
   Loans to stockholder                                                                -            (3,034)
   Repayment of stockholder loans                                                      -             5,109
   Purchase of STF notes                                                        (155,409)                -
   Sale (purchase) of marketable securities                                      142,895           (10,501)
                                                                                --------           --------
        Net cash used in investing activities                                    (44,269)          (30,243)
                                                                                --------           --------
Cash flows from financing activities:
   Proceeds from sale of 4 1/2% convertible subordinated notes                   300,000                 -
   Proceeds from sale of common stock                                                  -           139,069
   Proceeds from exercise of options and warrants                                 15,865             4,471
   Purchase of common stock warrants                                              (4,400)                -
   Payment of note payable to stockholder                                              -            (5,921)
                                                                                --------          ---------       
        Net cash provided by financing activities                                311,465           137,619
                                                                                --------          ---------
Net increase  in cash and cash equivalents                                       158,079           119,015
Cash and cash equivalents, at beginning of period                                  8,023            41,211
                                                                                --------          --------- 
Cash and cash equivalents, at end of period                                     $166,102          $160,226
====================================================================== ================= =================
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       -6-

<PAGE>



                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   Basis of Presentation               The consolidated  financial  statements
                                         include  the   accounts  of  Tel-  Save
                                         Holdings,  Inc.  and  its  wholly-owned
                                         subsidiaries, and have been prepared as
                                         if  the  entities  had  operated  as  a
                                         single  consolidated  group since their
                                         respective dates of incorporation.  All
                                         intercompany  balances and transactions
                                         have been eliminated.  

                                         The consolidated  financial  statements
                                         and   related   notes   thereto  as  of
                                         September  30,  1997 and for the  three
                                         and nine  months  ended  September  30,
                                         1997   and  1996   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, 1996 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 that report.
                                         The interim results are not necessarily
                                         indicative   of  the  results  for  any
                                         future periods.


2.   Stock Split                         On January 3, 1997, the Company's Board
                                         of  Directors  approved  a  two-for-one
                                         split of the  common  stock in the form
                                         of   a   100%   stock   dividend.   The
                                         additional  shares  resulting  from the
                                         stock split were distributed on January
                                         31, 1997, to all stockholders of record
                                         at the close of business on January 17,
                                         1997. The consolidated balance sheet as
                                         of  December  31,  1996   reflects  the
                                         recording  of the stock  split as if it
                                         had  occurred  on  December  31,  1996.
                                         Further,    all   references   in   the
                                         consolidated  financial  statements  to
                                         average  number of  shares  outstanding
                                         and related prices,  per share amounts,
                                         warrant and stock option data have been
                                         restated for all periods to reflect the
                                         stock split.



                                       -7-

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)


3.   AOL Agreement                       In      conjunction       with      the
                                         Telecommunications  Marketing Agreement
                                         (the  "AOL   Agreement")  with  America
                                         Online, Inc. ("AOL"),  the Company paid
                                         AOL a total of $100  million and issued
                                         two warrants to purchase  shares of the
                                         Company's   stock,   one  warrant  (the
                                         "First  Warrant")  to  purchase,  at an
                                         exercise price of $15.50 per share,  up
                                         to 5,000,000 shares, which vested as to
                                         2,500,000  shares  on  October  9, 1997
                                         ("Commercial  Launch  Date"),  when the
                                         Company's  service was  launched on the
                                         AOL online network, and as to 2,500,000
                                         shares on February  22, 1998 if the AOL
                                         Agreement has not  terminated,  and one
                                         warrant  (the   "Second   Warrant")  to
                                         purchase,   at  an  exercise  price  of
                                         $14.00  per  share,   up  to  7,000,000
                                         shares,  which  will  vest,  commencing
                                         December 31, 1997,  based on the number
                                         of subscribers to the Company's service
                                         and  would  vest  fully if there are at
                                         least 3.5 million such  subscribers  at
                                         any one time.  The initial  term of the
                                         AOL  Agreement  runs to June 30,  2000,
                                         and  the  AOL  Agreement  provides  for
                                         annual  extensions  by AOL of its  term
                                         thereafter.

                                         The $100  million  cash payment and the
                                         value   of  the   First   Warrant,   as
                                         described  below,  and $0.6  million of
                                         agreement  related  costs is  accounted
                                         for as follows:  (i) $35.9 million will
                                         be charged to expense  ratably over the
                                         period  from  the  signing  of the  AOL
                                         Agreement  to  December  31,  1997,  as
                                         payment for certain  exclusivity rights
                                         for that  period;  (ii)  $13.2  million
                                         will  be  treated  as   production   of
                                         advertising  costs and will be  charged
                                         to expense  on  October  9,  1997,  the
                                         Commercial Launch Date; and (iii) $60.6
                                         million,   the   balance  of  the  cash
                                         payment  and  the  value  of the  First
                                         Warrant  and  AOL   Agreement   related
                                         costs, represents the combined value of
                                         advertising  and  exclusivities   which
                                         extend   over   the  term  of  the  AOL
                                         Agreement   and   will  be   recognized
                                         ratably  after  the  Commercial  Launch
                                         Date  as   advertising   services   are
                                         received. Accordingly, during the three
                                         and nine  months  ended  September  30,
                                         1997,  the  Company   recognized  $10.8
                                         million  and $25.1  million of expense,
                                         respectively,     related     to    the
                                         exclusivity, as discussed in (i) above.

                                         While the First Warrant has been valued
                                         by an  independent  invest ment bank at
                                         $9.1 million at its date of grant,  the
                                         Company is  continuing  to discuss with
                                         the SEC  the  valuation  of this  First
                                         Warrant and any change to the valuation
                                         would  affect  the  amount  charged  to
                                         expense over the balance of the initial
                                         term of the AOL  Agreement.  The Second
                                         Warrant  will be valued and  charged to
                                         expense as and when  subscribers to the
                                         Company's  services under the AOL Agree
                                         ment  sign-up and the shares  under the
                                         Second Warrant vest.


                                      -8-

<PAGE>

                                         The AOL  Agreement  also  provides  for
                                         marketing  payments to AOL based on the
                                         "pre-tax profit" (as defined in the AOL
                                         Agreement)  in  each  calendar  quarter
                                         from  the  telecommunications  services
                                         provided by the Company. AOL's share of
                                         the  pre-tax  profit will vary from 50%
                                         to 70%,  depending  upon  the  level of
                                         revenues   from  such   services.   The
                                         Company  will  withhold  a  portion  of
                                         AOL's share of the pre-tax  profit as a
                                         recovery  of the initial  $100  million
                                         cash payment.  The Company is permitted
                                         to withhold up to $4.3  million in each
                                         of  the  10   quarters   ending   after
                                         December  31, 1997 and to withhold  33%
                                         of AOL's share of the  pre-tax  profits
                                         for every quarter ending after June 30,
                                         2002 until the entire $100 million cash
                                         payment has been recovered. AOL's share
                                         of  pre-tax  profits  in  excess of the
                                         $4.3    million   and   33%   will   be
                                         distributed as earned.

                                         The AOL Agreement also provides for the
                                         grant to AOL of additional  warrants to
                                         purchase  up  to  an   aggregate  of  2
                                         million   shares  if  AOL  extends  its
                                         obligations  under  the  AOL  Agreement
                                         beyond   June   30,   2000.   Any  such
                                         additional warrants that may be granted
                                         to AOL will be  valued at that time and
                                         will be  charged  as an  expense in the
                                         income statement.

4.   Customer Acquisition                The  Company  determined  in the second
                                         quarter  to  deemphasize   the  use  of
                                         direct  marketing to solicit  customers
                                         for the  Company as the  carrier and to
                                         focus  the  majority  of  its  existing
                                         direct marketing  resources on customer
                                         service and  support for the  marketing
                                         operations  of its carrier  partitions,
                                         on a fee basis. The Company  recognized
                                         fees of $2.7  million and $8.1  million
                                         for the  three  and nine  months  ended
                                         September   30,   1997,   respectively,
                                         included  in  other  income,  from  the
                                         services  net of related  costs of $8.7
                                         million and $14.6 million for the three
                                         and nine  months  ended  September  30,
                                         1997, respectively.

                                         The Company  recorded a one-time charge
                                         of $11.5  million in the quarter  ended
                                         June 30, 1997, primarily as a result of
                                         the Company changing its accounting for
                                         customer  acquisition  costs to expense
                                         them in the period  incurred versus the
                                         Company's     prior     treatment    of
                                         capitalizing customer acquisition costs
                                         and  amortizing  them  over a six month
                                         period.

                                         In October 1997, the Company decided to
                                         discontinue its internal  telemarketing
                                         operations    which   were    primarily
                                         conducted   through  American  Business
                                         Alliance  (which  was  acquired  by the
                                         Company in December  1996),  as part of
                                         its  restructuring  of  its  sales  and
                                         marketing efforts and will write-off in
                                         the  Company's   1997  fourth   quarter
                                         approximately    $25.2    million    of
                                         intangible and related assets.


                                       -9-

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)


5.   Proposed Merger with                As of July 16,  1997,  the  Company,  a
     Shared Technologies                 wholly-owned  subsidiary of the Company
     Fairchild,  Inc.                    ("Merger Sub") and Shared  Technologies
                                         Fairchild, Inc. ("STF") entered into an
                                         Agreement   and  Plan  of  Merger  (the
                                         "Merger Agreement"),  pursuant to which
                                         STF  would,  by  merger  with  and into
                                         Merger Sub (the "STF merger"), become a
                                         wholly-owned  subsidiary of the Company
                                         and  the  shares  of STF  common  stock
                                         would be  exchanged  for  shares of the
                                         Company's common stock.                

                                         Pursuant  to the  terms  of the  Merger
                                         Agreement, each share of STF stock will
                                         be converted  into the number of shares
                                         of the Company Common Stock  calculated
                                         by  dividing   $11.25  by  the  average
                                         closing  price  of the  Company  common
                                         stock  over  a  15-trading-day   period
                                         ending  on  the   trading   date  three
                                         trading days immediately  preceding the
                                         closing  date of the  Merger,  provided
                                         that the  exchange  ratio  shall not be
                                         greater   than  1.125   shares  of  the
                                         Company's  common  stock for a share of
                                         STF  common  stock  and  that,  if such
                                         average  closing  price is greater than
                                         $20 per share,  the exchange ratio will
                                         be  calculated  by dividing  the sum of
                                         (a) $11.25 plus the product of .3 times
                                         the  amount  by  which   such   average
                                         closing  price  exceeds $20 by (b) such
                                         average     closing    price.     STF's
                                         outstanding convertible preferred stock
                                         will be exchanged for  preferred  stock
                                         of  the  Company  with  substan  tially
                                         identical  terms or for  shares  of the
                                         Company's common stock.

                                         The   consummation  of  the  Merger  is
                                         subject   to   the   approval   of  the
                                         stockholders  of both the  Company  and
                                         STF  (including,  in  the  case  of the
                                         Company,  approval of an  amendment  to
                                         the    Company's    certifi   cate   of
                                         incorporation to increase the number of
                                         the  Company's   authorized  shares  of
                                         common   stock),   which  meetings  are
                                         scheduled to occur on December 1, 1997,
                                         as well as the Merger's qualifying as a
                                         pooling of  interests  transaction  for
                                         accounting purposes and other customary
                                         closing conditions.

                                         STF  has  approximately   $164  million
                                         aggregate face amount of 12 1/4% Senior
                                         Subordinated  Discount  Notes  due 2007
                                         (the "STF Notes").  As of September 30,
                                         1997,   the   Company   had   purchased
                                         substantially  all of the STF Notes and
                                         the remaining  portion of the STF Notes
                                         were purchased during October 1997.


                                      -10-

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)


6.   4 1/2% Convertible                  In  September  1997,  the Company  sold
     Subordinated  Notes                 $300 million of its 4 1/2%  Convertible
                                         Subordinated   Notes  which  mature  on
                                         September  15,  2002 (the  "Convertible
                                         Notes").  Interest  on the  Convertible
                                         Notes is due and  payable  semiannually
                                         on  March 15 and  September  15 of each
                                         year.   The   Convertible   Notes   are
                                         unsecured  obligations  of the  Company
                                         and are subordinate in right of payment
                                         to all existing and future  senior debt
                                         (as defined) and are subordinate to all
                                         liabilities     of    the     Company's
                                         subsidiaries. The Convertible Notes are
                                         convertible,   at  the  option  of  the
                                         holder  thereof,  at any time  after 90
                                         days  follow  ing the date of  original
                                         issuance thereof and prior to maturity,
                                         unless previously redeemed, into shares
                                         of  the  Company's  common  stock  at a
                                         conversion   price  of  $24.61875   per
                                         share.   The   Convertible   Notes  are
                                         redeemable, in whole or in part, at the
                                         option of the  Company,  at any time on
                                         or after September 15, 2000, at 101.80%
                                         of par prior to September  14, 2001 and
                                         100.90%  of  par thereafter.

7.   Recent Accounting                   In   February   1997,   the   Financial
     Pronouncements                      Accounting   Standards  Board  ("FASB")
                                         issued     Statement    of    Financial
                                         Accounting  Standards ("SFAS") No. 128,
                                         "Earnings    Per   Share,"   which   is
                                         effective  for fiscal years ended after
                                         December  15,  1997.  The Company  will
                                         adopt  Statement  No.  128 for the year
                                         ended  December 31, 1997.  The adoption
                                         of this  standard  is not  expected  to
                                         have a material impact on the Company's
                                         earnings per share.

                                         In June 1997,  the FASB issued SFAS No.
                                         130, "Reporting Compre hensive Income",
                                         which    establishes    standards   for
                                         reporting and display of  comprehensive
                                         income,  its components and accumulated
                                         balances.   Comprehensive   income   is
                                         defined  to  include   all  changes  in
                                         equity  except  those   resulting  from
                                         investments by owners and distributions
                                         to  owners.  Among  other  disclosures,
                                         SFAS 130  requires  that all items that
                                         are  required  to be  recognized  under
                                         current    accounting    standards   as
                                         components of  comprehensive  income be
                                         reported in a financial  statement that
                                         is displayed  with the same  prominence
                                         as other financial statements.

                                         SFAS  130 is  effective  for  financial
                                         statements for periods  beginning after
                                         December    15,   1997   and   requires
                                         comparative   information  for  earlier
                                         years to be  restated.  Because  of the
                                         recent   issuance  of  this   standard,
                                         management  has  been  unable  to fully
                                         evaluate   the  impact,   if  any,  the
                                         standard  may have on future  financial
                                         statement  disclo  sures.   Results  of
                                         operations   and  financial   position,
                                         however,    will   be   unaffected   by
                                         implementation of this standard.


                                      -11-

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

                                         In June 1997,  the FASB issued SFAS No.
                                         131,  "Disclosures about Segments of an
                                         Enterprise  and  Related  Information",
                                         which   super   sedes   SFAS  No.   14,
                                         Financial  Reporting  for Segments of a
                                         Business    Enterprise.     SFAS    131
                                         establishes  standards for the way that
                                         public  companies  report   information
                                         about  operating   segments  in  annual
                                         financial   statements   and   requires
                                         reporting of selected information about
                                         operating segments in interim financial
                                         statements  issued  to the  public.  It
                                         also    establishes    standards    for
                                         disclosures   regarding   products  and
                                         services,  geographic  areas  and major
                                         customers.  SFAS 131 defines  operating
                                         segments  as  components  of a  company
                                         about    which    separate    financial
                                         information   is   available   that  is
                                         evaluated   regularly   by  the   chief
                                         operating  decision  maker in  deciding
                                         how  to  allocate   resources   and  in
                                         assessing performance.

                                         SFAS  131 is  effective  for  financial
                                         statements for periods  beginning after
                                         December    15,   1997   and   requires
                                         comparative   information  for  earlier
                                         years to be  restated.  Because  of the
                                         recent   issuance  of  this   standard,
                                         management  has  been  unable  to fully
                                         evaluate  the  impact,  if any,  it may
                                         have  on  future  financial   statement
                                         disclosures.  Results of operations and
                                         financial  position,  however,  will be
                                         unaffected  by  implementation  of this
                                         standard.


                                      -12-

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES




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

        INTRODUCTION

        The Company was  founded in 1989 as a  switchless  reseller of AT&T long
        distance  services to small and  medium-sized  businesses.  In 1997, the
        Company    commenced   the    deployment    of   its   own    nationwide
        telecommunications  network, One Better Net ("OBN"),  consisting of five
        Company-owned,   AT&T  (now  Lucent)  manufactured   5ESS-2000  switches
        connected  by  AT&T  transmission  facilities.  A vast  majority  of the
        Company's new outbound end users are now being provisioned to OBN.

        RESULTS OF OPERATIONS

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


<TABLE>
<CAPTION>
                                                                    PERCENTAGE OF SALES
                                                                    -------------------
                                            FOR THE THREE MONTHS ENDED              FOR THE NINE MONTHS ENDED
                                                  SEPTEMBER 30,                           SEPTEMBER 30,
                                            --------------------------              -------------------------
                                             1997               1996                1997                1996
                                             ----               ----                ----                ----
<S>                                         <C>                <C>                 <C>                  <C>   
SALES                                        100.0%             100.0%              100.0%               100.0%
COST OF SALES                                 97.4               86.1                99.0                 86.6
                                           -------              -----             -------                -----
GROSS PROFIT                                   2.6               13.9                 1.0                 13.4
SELLING, GENERAL AND ADMINISTRATIVE            6.6                4.1                 5.9                  4.3
                                           -------               ----             -------                 ----
OPERATING INCOME (LOSS)                       (4.0)               9.8                (4.9)                 9.1
OTHER INCOME, NET                              5.5                9.0                 5.1                  4.7
                                           -------               ----             -------                 ----
INCOME BEFORE PROVISION FOR
   INCOME TAXES                                1.5               18.8                 0.2                 13.8
PROVISION FOR INCOME
   TAXES                                       0.6                7.1                 0.1                  5.2
                                           -------              -----              ------                -----
NET INCOME                                     0.9%              11.7%                0.1%                 8.6%
</TABLE>


                                       13

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES


        THREE  MONTHS  ENDED  SEPTEMBER  30,  1997  TO THE  THREE  MONTHS  ENDED
        SEPTEMBER 30, 1996

        Sales. Sales increased by 33.7% to $80.3 million in the third quarter of
        1997 from $60.1  million in the third  quarter of 1996.  The increase in
        sales  related  primarily to the marketing of the Company's OBN services
        and the addition of new partitions.

        Although  the  Company  expects  sales  to  increase   through  the  AOL
        Agreement,  the  addition  of new  partitions,  the  growth  of end user
        business  through existing  partitions,  the pending merger with STF and
        possible future acquisitions, in view of the intense competition in this
        industry,  there can be no assurance  that the Company will  continue to
        increase sales on a quarter-to-quarter or year-to-year basis.

        Cost of Sales.  The Company's cost of sales  increased by 51.1% to $78.2
        million in the third  quarter  of 1997 from  $51.8  million in the third
        quarter  of 1996 as a result  of  increased  sales and a charge of $10.8
        million related to the  exclusivity  portion of the AOL Agreement ( Note
        3).  Absent the AOL charge,  the  Company's  cost of sales  increased by
        30.1% to $67.4  million in the third  quarter of 1997 from $51.8 million
        in the third quarter of 1996.

        Prior to 1997, network usage costs consisted solely of "bundled" charges
        from AT&T.  Beginning  in 1997,  the Company also  incurred  "unbundled"
        charges,  including local access fees,  associated with the operation of
        OBN. Both  "bundled"  and  "unbundled"  charges are directly  related to
        calls made by the Company's end users.

        Although the Company's service was launched on the AOL online network in
        October 1997 on a limited basis,  with the general  public  promotion of
        the service  anticipated to begin late in the 1997 fourth  quarter,  the
        Company  and AOL  continue  to work  together to develop and to maintain
        online  marketing  and  billing of long  distance  service  that will be
        needed to support the offering  and there can be no assurance  that such
        development  and testing will be completed  successfully  or in a timely
        manner. The Company currently  estimates that between 2% and 6% of AOL's
        custom ers will need to sign up for the Company's long distance  service
        in order for the  Company  to break  even on its  investment  in the AOL
        Agreement.  With  respect  to the  cost  of  sales  relating  to the AOL
        Agreement, see Note 3.


                                       14

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES


        As a switchless  reseller of AT&T long distance services and in order to
        provide its OBN services,  the Company  subscribes to contract  tariffs.
        The  ability of the  Company  to  negotiate  competitive  terms of these
        contract tariffs has been an important reason for the Company's success.
        In October 1996, the Company  subscribed to a new AT&T contract  tariff,
        which was further  revised in December  1996 and in May 1997 and permits
        the Company to continue to resell AT&T long distance services, including
        AT&T-SDN  service,  through  mid-1998,  and also includes,  through late
        2000, other AT&T services (such as international long distance,  inbound
        and outbound  services)  that will be used in the  Company's  nationwide
        telecommunications  network,  OBN. The rates that the Company pays under
        the 1996 AT&T  contract  tariff are more  favorable  to the Company than
        under previous  tariffs.  During its term, the 1996 AT&T contract tariff
        will enable the Company to minimize possible attrition that might result
        from moving  existing  end users from the AT&T  network to OBN. The 1996
        AT&T contract  tariff also permits a more gradual  introduction  of OBN,
        which has reduced the expense of providing  the  capacity  required in a
        more rapid  phase-in  of OBN and  lessened  the impact of any  technical
        difficulties  during the phase-in of OBN. The 1996 AT&T contract  tariff
        commits the Company to purchase  $285  million of service from AT&T over
        its 4 year  term,  including  at least $1  million  per month of interna
        tional  service.  The Company can  terminate  the 1996  contract  tariff
        without  liability  to AT&T in mid-1998 if the Company has  generated at
        least $105 million in usage  charges,  including at least $15 million in
        international usage charges and the Company currently expects that these
        thresholds  will be met ($105  million  and $15  million)  in the fourth
        quarter of 1997.

        OBN and the  operation of the Company's own switches and network have to
        date and will in the future  require  the  Company to incur  systems and
        equipment  maintenance,  lease and network  personnel  expenses  signifi
        cantly  above the levels  historically  experienced  by the Company as a
        switchless reseller of AT&T services.  However, these per call costs, in
        combination with "unbundled" charges paid to LECs and AT&T, were, in the
        quarter and the nine months ended  September 30, 1997,  and are expected
        in the future,  to be less than the per call cost currently  incurred by
        the Company as a switchless  reseller paying "bundled"  charges to AT&T.
        The Company is already  expanding the capacity of OBN,  which  currently
        could accommodate  400,000 new residential  customers.  Separately,  the
        Company has entered into an agreement  with AT&T to purchase its Carrier
        Solutions  Platform  ("CSP")  service  for an initial  period of six (6)
        months  (beginning  in August 1997)  subject to either  party's right to
        terminate  the  agreement.  The  Company is  negotiating  a longer  term
        agreement with AT&T for such service.  The CSP service provides OBN with
        significant   additional  capacity  and  would  enable  the  Company  to
        accommodate  large  numbers of  additional  customers on OBN by handling
        their peak load or overflow traffic. CSP has been installed, and testing
        is expected to be completed by mid-December.  This expansion of capacity
        costs the Company  approximately  $180,000 per month.  By utilizing CSP,
        the Company  expects that it can operate its network  close to capacity,
        thereby  lowering  transport costs.  Further,  CSP gives the Company the
        ability  to  seamlessly  migrate  traffic  to OBN and reduce the task of
        forecasting demand.


                                       15

<PAGE>



                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

        Gross  Margin.  Gross margin  decreased to 2.6% in the third  quarter of
        1997 from 13.9% during the third quarter of 1996.  The decrease in gross
        margin was primarily due to the AOL charge discussed above.  Absent this
        charge,  gross margin  increased  to 16.1% in the third  quarter of 1997
        from 13.9% during the third quarter of 1996,  due to lower network usage
        costs on the  Company's  current  contract  tariff with AT&T and network
        costs  for OBN  services  which  were  lower  on a per call  basis  when
        compared to those paid to AT&T.

        Although the basic rates of the three largest long  distance  carriers -
        AT&T,  MCI and  Sprint - have  historically  increased,  AT&T and  other
        carriers  have  announced new price plans and  significantly  simplified
        rate structures  aimed at residential  customers (the Company's  primary
        target  audience under the AOL  Agreement)  which may have the impact of
        lowering  overall long distance  prices.  There can be no assurance that
        AT&T or other carriers will not make similar offerings  available to the
        small and medium sized  businesses  that the Company  currently  serves.
        Although  OBN is expected to make the  Company  more price  competitive,
        further  reductions in long distance prices charged by competitors still
        may have a material  adverse  impact on the  Company's  gross  margin in
        future periods.

        Selling,  general  and  administrative  expenses.  Selling,  general and
        administrative expenses increased by 117.8% to $5.3 million in the third
        quarter  of 1997 from $2.5  million in the third  quarter  of 1996.  The
        increase  in  selling,  general  and  administrative  expenses  was  due
        primarily to the costs  associated with hiring  additional  personnel to
        support  the  Company's   continuing   growth,   the  development  costs
        associated with AOL and increased fees for professional services.

        The Company  expects  selling,  general and  administrative  expenses to
        continue to increase as it implements, operates and maintains OBN and as
        it rolls out the AOL service offering. If the STF merger is consummated,
        the  Company  also  anticipates  an increase  in such  expenses  for the
        integration  of the  operations  of  STF.  These  efforts  will  require
        additional  personnel,  equipment and support.  The additional  selling,
        general and administrative expenses may be offset by the increased sales
        and profit gained as a result of the implementation of the components of
        the Company's  strategic  plan, but increased  costs may have an adverse
        impact on results of  operations  and there can be no assurances of such
        increased sales and profits.

        Other Income. Other income was $4.4 million in the third quarter of 1997
        versus $5.4 million for the third quarter of 1996. Other income consists
        primarily  of fees for  customer  service and support for the  marketing
        operations  of the  Company's  carrier  partitions  in 1997 and interest
        income earned on the Company's cash balances. Other income for the third
        quarter of 1997 was offset by STF merger-related  costs of $1.4 million.

        Provision for income taxes.  The Company's  effective tax rate increased
        to  39.0%  for the  three  months  ended  September  30,  1997  from the
        effective  tax rate of 37.7% for the three  months ended  September  30,
        1996 due to an anticipated higher effective state tax rate in 1997.


                                       16

<PAGE>



                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES


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

        Sales.  Sales  increased  by 34.7% to $226.5  million  in the first nine
        months of 1997 from $168.2 million in the first nine months of 1996. The
        increase in sales  related  primarily to the  marketing of the Company's
        OBN services and the addition of new partitions.

        Cost of Sales. The Company's costs of sales increased by 54.0% to $224.3
        million  in the first  nine  months of 1997 from  $145.6  million in the
        first nine months of 1996 as a result of increased  sales and charges of
        $11.5  million  primarily  as a result  of the  Company's  change in its
        accounting  for customer  acquisition  costs (Note 4) and $25.1  million
        related to the exclusivity portion of the AOL Agreement (Note 3). Absent
        the customer  acquisition  and AOL charges,  the Company's cost of sales
        increased  by 28.9% to $187.7  million for the first nine months of 1997
        from $145.6 million for the first nine months of 1996.

        Gross Margin. Gross margin decreased to 1.0% in the first nine months of
        1997 from 13.4%  during the first nine months of 1996.  The  decrease in
        gross margin was primarily due to the charges  discussed  above.  Absent
        the  customer  acquisition  and AOL charges,  gross margin  increased to
        17.2% in the first  nine  months of 1997  from  13.4% in the first  nine
        months  of  1996,  due to lower  network  usage  costs on the  Company's
        current  contract  tariff with AT&T and network  costs for OBN  services
        which  were lower on a per call  basis  when  compared  to those paid to
        AT&T, offset by an increase in direct marketing costs.

        Selling,  general  and  administrative  expenses.  Selling,  general and
        administrative expenses increased by 83.5% to $13.3 million in the first
        nine months of 1997 from $7.2  million in the first nine months of 1996.
        The  increase in selling,  general and  administrative  expenses was due
        primarily to the costs  associated with hiring  additional  personnel to
        support  the  Company's   continuing   growth,   the  development  costs
        associated with AOL, and increased fees for professional services.

        Other Income. Other income was $11.6 million in the first nine months of
        1997 versus $7.9 million for the first nine months of 1996. Other income
        consists  primarily  of fees for  customer  service  and support for the
        marketing  operations of the Company's  carrier  partitions and interest
        income earned on the Company's cash balances.  Other income for the nine
        months ended September 30, 1997 was offset by STF  merger-related  costs
        of $1.4 million.

        Provision for income taxes.  The Company's  effective tax rate increased
        to 39.0% for the nine months ended September 30, 1997 from the effective
        tax rate of 37.7% for the nine months ended September 30, 1996 due to an
        anticipated higher effective state tax rate in 1997.


                                       17

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES


        SOME POTENTIAL FUTURE CHARGES

        Of the $100  million  payment  to AOL  (plus  the value of the 5 million
        share AOL warrant,  which is valued,  subject to possible  increase,  as
        discussed   above,   at   $9.1   million,   and  $.6   million   of  AOL
        Agreement-related   costs),  the  Company  anticipates  that,  with  the
        commercial  launch of the  Company  service in early  October  1997,  an
        aggregate of approximately $35 million will be charged to expense in the
        fourth  quarter of 1997 (an aggregate of $25.1 million was so charged in
        the first  three  quarters  of 1997).  The  balance  will be  recognized
        ratably over the balance of the term of the AOL  Agreement,  the initial
        term of which  expires on June 30,  2000,  as  advertising  services are
        received.  The AOL warrant for up to 7 million shares will be valued and
        charged to expense as and when  subscribers  to the  Company's  services
        under the AOL Agreement  sign-up and the shares under such warrant vest.
        The amount of such charges, which could be significant, will be based on
        the extent to which such AOL warrants  vest and the market prices of the
        Company's Common Stock at the time of vesting and therefore such charges
        are not currently determinable.  Generally,  the higher the market price
        of the  Company's  Common  Stock at the time of vesting,  the larger the
        amount of the charge will be. The Company also  anticipates that it will
        incur additional promotional expenses in the 1997 fourth quarter and the
        1998 first quarter in connection  with the general  public  promotion of
        its service under the AOL Agreement.  If the AOL Agreement  should prove
        unsuccessful, any remaining amount of the total value paid under the AOL
        Agreement could be written off earlier.

        As discussed above, in connection with the Company's decision in October
        1997 to discontinue its internal  telemarketing  operations,  which were
        primarily  conducted  through  American  Business  Alliance  (which  was
        acquired by the Company in December 1996), as part of its  restructuring
        of its sales and marketing  efforts,  the Company will write-off approxi
        mately $25.2 million of intangible and related assets in the 1997 fourth
        quarter.

        In addition to the approximately $19.0 million one-time  acquisition and
        transition  related  pre-tax  charges  and  special  pre-tax  charges of
        approxi mately $39.0 million  related to the  acquisition and retirement
        of the STF Notes, which will be recorded in the quarter in which the STF
        merger is  consummated,  various  special  costs are  anticipated  to be
        incurred in realizing some of the benefits of the STF merger,  including
        enhancing  the  Company's  (post STF merger)  direct  sales  force,  and
        associated  with  systems  modifications  and other  integration-related
        charges after the STF merger. While the exact timing,  nature and amount
        of these charges cannot be predicted,  the Company  currently  estimates
        that  pre-tax   charges  in  connection  with  the   consolidation   and
        centralization  of the  facilities  of STF and the  related  program  of
        upgrading  equipment and eliminating  duplicative and obsolete equipment
        and incurred in realizing  some of the other benefits of the STF merger,
        will range from $50.0 million to $70.0 million.  These charges currently
        are  anticipated to be recorded during the 1997 fourth quarter and first
        half of 1998.  It is also  possible,  as the Company  proceeds  with the
        integration  of STF  with  the  Company,  that  further  charges  may be
        incurred.


                                       18

<PAGE>



                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

        The  Company  granted  an option to an  executive  officer  to  purchase
        800,000  shares of Company  Common Stock at an exercise price of $11.125
        per  share.  The  option  granted  is  subject  to the  approval  of the
        stockholders  and is  being  submitted  for  approval  at the  Company's
        stockholder  meeting  scheduled  for  December 1, 1997.  Approval of the
        option grant will result in compensation expense equal to the difference
        between the exercise  price and the market  value of the Company  Common
        Stock on the  date of such  approval.  In  addition,  a newly  appointed
        executive officer,  in connection with his employment  purchased 200,000
        shares of  Company  Common  Stock at a price of $4.25  per share  from a
        former executive officer of the Company.  This purchase will result in a
        compensation  expense  in the fourth  quarter  of 1997 of  approximately
        $3,400,000 based on the difference between the purchase price and market
        value of the Company Common Stock on the date of purchase.


                                       19

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES


        LIQUIDITY AND CAPITAL RESOURCES

        The Company has since  September 1995 raised capital  primarily  through
        public and private  distributions  of its  securities.  In fall 1995 and
        spring of 1996 the Company consummated public offerings of shares of the
        Com pany's  Common Stock and received net proceeds of $42.8  million and
        $139.1 million, respectively.

        In September  1997, the Company sold $300 million of 4 1/2%  Convertible
        Subordinated  Notes which mature on September 15, 2002 (the "Convertible
        Notes").   Interest  on  the   Convertible   Note  is  due  and  payable
        semiannually  on March 15 and September 15 of each year. The Convertible
        Notes are convertible,  at the option of the holder thereof, at any time
        after  December  9,  1997  and  prior  to  maturity,  unless  previously
        redeemed,  into shares of the  Company's  Common  Stock at a  conversion
        price of $24.61875 per share. The Convertible  Notes are redeemable,  in
        whole  or in  part,  at the  Company's  option,  at any time on or after
        September  15,  2000 at 101.80% of par prior to  September  14, 2001 and
        100.90% of par thereafter.

        During  1996,  certain  options and  warrants to purchase  shares of the
        Company's  Common  Stock  were  exercised  and the  Company  repurchased
        approximately  428,000  shares,  which  are  held  as  treasury  shares,
        yielding to the Company net  proceeds of $7.7  million.  During the nine
        months  ended  September  30,  1997,  certain  options  and  warrants to
        purchase  shares of the  Company's  Common Stock were  exercised and the
        Company  repurchased  certain  Common  Stock  Warrants,  yielding to the
        Company net proceeds of $11.5 million. The tax benefit realized from the
        options and warrants was  approximately  $21.3 million in 1996 and $14.6
        million for the nine months ended September 30, 1997 and is reflected as
        an adjustment to additional paid-in capital.

        In June 1997, the Company  negotiated a one year,  unsecured,  committed
        line of credit with First Union Bank ("First Union Credit Facility") for
        borrowings  of up to $65.0  million.  Under the terms of the First Union
        Credit  Facility the Company is required to pay an  availability  fee of
        $81,250 per annum, or 0.125% of the total available borrowings; interest
        on  borrowing  is payable  monthly at First Union Bank's prime rate less
        0.5% or LIBOR plus 0.875%,  at the  Company's  option;  and principal is
        payable  upon demand by First Union Bank.  The Company is  renegotiating
        certain  covenants of the First Union Credit Facility as a result of the
        issuance  by the  Company  of the  Convertible  Notes  and  until  those
        covenants  are  renegotiated,  the First  Union  Credit  Facility is not
        available to the Company.  There can be no assurances that the covenants
        will  be  renegotiated.  At  September  30,  1997,  the  Company  had no
        borrowings outstanding under the First Union Credit Facility.

        The Company has put out to bid short-term  credit  facilities with other
        banks.  The Company believes that it will be able to obtain a commitment
        for a short-term  credit  facility in an amount  sufficient  to meet its
        needs over the next 12 months,  but there can be no assurance  that such
        can be obtained.

        The Company's  working capital,  excluding  prepaid AOL marketing costs,
        was $235.4 million and $175.6 million at September 30, 1997 and December
        31, 1996, respectively.

        The Company invested $27.4 million in capital  equipment during the nine
        months ended September 30, 1997, of which $16.8 million was used for the
        acquisition of capital equipment and installation  costs relating to the
        deployment of OBN. To date,  through September 30, 1997, the Company has
        invested  $41.7  million for the  acquisition  of capital  equipment and
        installation costs relating to the deployment of OBN.


                                       20

<PAGE>



                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES


        As of  September  30,  1997,  STF had bank  debt of  approximately  $116
        million and outstanding  redeemable  preferred stock which is redeemable
        for cash of  approximately  $22.0 million upon  consummation  of the STF
        merger. The Company will be required upon consummation of the STF merger
        to payoff all of STF's  bank debt  (unless  it is  renegotiated)  and to
        redeem the  redeemable  preferred  stock.  These  payments  coupled with
        approximately  $19  million  of  one-time  acquisition  and  transaction
        related  costs due and  payable  at the  consummation  of the STF merger
        would  aggregate an amount equal to  approximately  91% of the Company's
        cash,  cash  equivalents  and marketable  securities as of September 30,
        1997. Upon  consummation  of the STF merger the Company's  investment in
        the STF Notes will be eliminated in connection  with the  extinguishment
        of the  STF  Notes.  In  addition,  the  Company  plans  to  purchase  a
        significant   amount  of   telecommunications   equipment  in  order  to
        accomplish  the objective of the STF merger,  which is to take advantage
        of opportunities provided to offer telecommunications services using OBN
        to a broader  market of buildings  and  customers  than those  currently
        served by STF.

        In addition to the approximately $19.0 million one-time  acquisition and
        transition  related  pre-tax  charges  and  special  pre-tax  charges of
        approximately $39.0 million related to the acquisition and retirement of
        the STF Notes,  which will be  recorded  in the quarter in which the STF
        merger will be consummated,  various special costs are anticipated to be
        incurred in realizing some of the benefits of the STF merger,  including
        enhancing  the  Company's  (post STF merger)  direct  sales  force,  and
        associated  with  systems  modifications  and other  integration-related
        charges after the STF merger. While the exact timing,  nature and amount
        of these charges cannot be predicted,  the Company  currently  estimates
        that  pre-tax   charges  in  connection  with  the   consolidation   and
        centralization  of the  facilities  of STF and the  related  program  of
        upgrading  equipment and eliminating  duplicative and obsolete equipment
        and incurred in realizing  some of the other benefits of the STF merger,
        will range from $50.0 million to $70.0 million.  These charges currently
        are  anticipated to be recorded during the 1997 fourth quarter and first
        half of 1998.  It is also  possible,  as the Company  proceeds  with the
        integration  of STF  with  the  Company,  that  further  charges  may be
        incurred.

        The  Company  generally  does not have a  significant  concentration  of
        credit risk with respect to accounts  receivable due to the large number
        of partitions and 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.

        As a result of the payments required upon consummation of the STF merger
        additional  financial  arrangements  may be necessary in connection with
        telecommunications  equipment  purchases.  Upon  consummation of the STF
        merger,  the Company  will issue a  significant  number of shares of its
        common  stock ( Note 5)  (approximately  14 million  shares  assuming an
        average closing price for the Company's common stock over the 15 trading
        days prior to the closing of $21.00).


                                       21

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES


        If the amendment to the Company's  Amended and Restated  Certificate  of
        Incorporation  (the  "Charter"),  increasing  the  number of  authorized
        shares of Company  Common  Stock from  100,000,000  to  300,000,000,  is
        approved at the Company's stockholders meeting scheduled for December 1,
        1997,  the Company  will be  authorized  to issue up to an  aggregate of
        300,000,000  shares  of  Company  Common  Stock.  The  Company  may  use
        authorized  and  unissued  shares of Company  Common  Stock for  various
        corporate   purposes,   including,   but  not  limited  to,  acquisition
        transactions,  and such shares may be issued by the  Company's  Board of
        Directors without further  stockholder  action unless the issuance is in
        connection  with  a  transaction  for  which  stockholder   approval  is
        otherwise  required  under the Charter,  applicable  law,  regulation or
        agreement.

        The   Company   regularly   considers   growth   opportunities   through
        acquisitions,  joint ventures and partnerships as well as other business
        expansion  opportunities.  The Company  previously  reported that it had
        proposed to ACC Corp. ("ACC") for its consideration a merger transaction
        between  the  Company  and ACC,  in which ACC would be  acquired  by the
        Company and ACC's stockholders would receive $50 in the Company's Common
        Stock in  exchange  for each share of ACC common  stock (as of August 1,
        1997, there were  approximately  16.8 million shares of ACC common stock
        reported to be  outstanding),  and that the Company intended to commence
        negotiations  with ACC with respect to a potential  merger  transaction.
        The  Company  also  stated  that it does not intend to make any  further
        announcements  regarding any such potential merger  transaction until it
        has either reached a definitive agreement with ACC or it has decided not
        to proceed with such a transaction.

        Any such transaction between the Company and ACC is subject, among other
        things,  to the satisfactory  completion of due diligence  reviews,  the
        negotiation of a mutually  satisfactory  agreement,  approval thereof by
        the companies'  respective  boards of directors,  the transaction  being
        accounted  for  as a  pooling-of-interests  transaction,  any  necessary
        regulatory approvals and any necessary stockholder approvals.  There can
        be no assurance that any agreement will be reached or as to the terms of
        any such agreement, should it be reached and approved.

                                    * * * * *


                                       22

<PAGE>



                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES


        In  addition  to  historical  information,  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.  Important factors that could cause such actual results to
        differ materially  include,  among others,  adverse  developments in the
        Company's  relationship with AT&T,  increased price competition for long
        distance  services,  delays in the direct  marketing of residential long
        distance  services under the AOL  Agreement,  attrition in the number of
        end users, and changes in government policy,  regulation and enforcement
        and statements regarding the STF merger are based on the consummation of
        the STF merger, which is subject to a number of conditions.  The Company
        undertakes no obligation to update its forward-looking statements.


                                       23

<PAGE>



                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION


Item 1.        Legal Proceedings

               None.

Item 2.        Changes in Securities

               In August,  1997 in connection  with the exercise of  outstanding
               Warrants the Company issued 600,000 shares of its common stock to
               the holder of such  Warrant  upon the  payment of  $2,450,000  in
               accordance with the terms thereof.  The Company believes that the
               issuance of such shares was exempt  from  registration  under the
               Securities  Act of 1933 ("1933  Act")  pursuant  to Section  4(2)
               thereunder.

               In  September  1997  the  Company  sold  $300  million  of 4 1/2%
               Convertible Subordinated Notes which mature on September 15, 2002
               ("Convertible  Notes") to Salomon Brothers Inc.,  Deutsche Morgan
               Grenfell, Bear Stearns & Co. Inc., Smith Barney, Inc., Robertson,
               Stephens  &  Company  and  First  Union  Capital   Markets  Corp.
               (collectively,  "Initial  Purchasers").  The  Initial  Purchasers
               offered and sold the Convertible Notes to investors.  The Company
               believes  that the issuance of the  Convertible  Notes was exempt
               from  registration  under the 1933 Act  pursuant to Section  4(2)
               thereunder.

Item 3.        Defaults Upon Senior Securities

               None.

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

               (a) Not applicable.

               (b) Not applicable.

               (c) Not applicable.

Item 5.        Other Information

               On  November  13,  1997,  the  Company  and  STF  entered  into a
               five-year  telecommunications  services agreement under which the
               Company will  provide  substantially  all of STF's long  distance
               telecommunications services. Under the terms of the agreement, in
               each year of the agreement,  STF is required to purcahse from the
               Company a minimum of 85% of the long distance  telecommunications
               services  that STF  purchases  in such  year and to make  minimum
               annual  payments to the Company  (ranging from $15 million in the
               first year to $27 million in the fifth year of the agreement, for
               a total of $105 million in minimum  payments over the term of the
               agreement),  or to pay to the  Company  an  amount  equal  to the
               greater  of (i)  50%  of the  shortfall  in  the  minimum  annual
               payments  for such year and (ii) the amount by which 85% of STF's
               total purchases of long distance  telecommunications  services in
               such year exceeds the percentage of such total purchased from the
               Company.  In addition,  if STF does not purchase from the Company
               the minimum  percentage of its services in any year, STF must pay
               an additional  30% surchage on the services  purchased  under the
               agreement  in such year,  and, if STF  terminates  the  agreement
               before  the end of its  term  without  cause,  it must pay to the
               Company an additional amount equal to 50% of the aggregate of the
               minimum annual payments for the remaining years of the agreement.



                                       24

<PAGE>


                    TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES


Item 6.        Exhibits and Reports on Form 8-K

               (a)   Exhibits

                     Exhibit 10       Employment Agreement with George P. Farley

                     Exhibit 11       Computation of Net Income Per Share

                     Exhibit 27       Financial Data Schedule

               (b)   Reports on Form 8-K

                     Since June 30, 1997, the following  Current Reports on Form
               8-K have been filed by the Company:

                     Current Report on Form 8-K, dated July 22, 1997,  reporting
                     the  execution  of an  Agreement  and Plan of  Merger  with
                     Shared Technologies  Fairchild Inc. ("STF"),  providing for
                     the merger (the "STF  Merger")  of STF with a wholly  owned
                     subsidiary  of  the  Company,  and of  related  agreements,
                     including certain voting agreements by STF stockholders.

                     Current  Report  on Form  8-K/A,  dated  August  15,  1997,
                     including  certain  historical   financial   statements  of
                     American  Business  Alliance,   Inc.  ("ABA")  and  certain
                     Company  pro  forma  financial  statements  reflecting  the
                     Company's acquisition of substantially all of ABA's assets.

                     Current  Report  on Form  8-K,  dated  September  2,  1997,
                     reporting the Com pany's entering into a $150 million short
                     term  credit  facility  and  including  certain  pro  forma
                     financial statements reflecting the proposed STF Merger and
                     a summary of certain Company risk factors.

                     Current  Report  on Form  8-K,  dated  September  5,  1997,
                     reporting the private  placement of $300,000,000  principal
                     amount of the  Company's  4-1/2%  Convertible  Subordinated
                     Notes.

                     Current  Report  on  Form  8-K,  dated  October  29,  1997,
                     reporting the execution of a further voting  agreement with
                     a stockholder of STF in respect of the proposed STF Merger.

                     Current  Report  on  Form  8-K,  dated  November  5,  1997,
                     reporting the Com pany's proposal to ACC Corp. ("ACC") of a
                     merger  transaction  between  the  Company  and ACC and the
                     Company's purchase of an interest in US WATS, Inc.

                     Current  Report  on  Form  8-K,  dated  November  7,  1997,
                     reporting  further  developments  with regard to its merger
                     transaction proposal to ACC.


                                       25

<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.



Date: November 14 , 1997     TEL-SAVE HOLDINGS, INC.
                             -----------------------
                             (Registrant)



                             By:   /s/ Daniel Borislow
                                 -----------------------------------------------
                                 Daniel Borislow
                                 Chairman of the Board,
                                 Chief Executive Officer and Director


                             By: /s/ George P. Farley
                                 -----------------------------------------------
                                 George P. Farley
                                 Chief Financial Officer, Treasurer and Director


                             By: /s/ Kevin R. Kelly
                                 -----------------------------------------------
                                 Kevin R. Kelly
                                 Controller


                                       26

<PAGE>

EXHIBIT INDEX

10        Employment Agreement

11        Tel-Save Holdings, Inc. and subsidiaries computation of net income 
          per share

27        Financial Data Schedule